PROCEDURE FOR COMPUTATION

OF LONG-TERM AND
SHORT-TERM CAPITAL
GAINS/LOSSESS
BCOM 4 SEM Subject: Income Tax
LMS Video Lesson

Dr. P. SUBBA LAKSHUMMA

SKR & SKR Govt. College for Women (A),
Kadapa
Email. Id :[email protected]
 Learning Objectives:
Students can develop the following abilities after
this video session.

➔ To remember the concepts of Capital Gains/Losses.

➔ To Understand the Procedure for Computation of
Capital Gains
➔ To apply the concepts wherever Applicable
➔ To Analyse Long-term and Short-term Capital
Assets.
➔ To develop ability to Calculate Capital Gains
➔ To acquire Problem Solving Capicity.
Procedure for computation of Long-term and Short-term Capital
Gains/Losses:
Capital Gains:
When we sell a capital asset at a higher price than its cost of acquisition, we
will get profit. This profit is called as Capital Gain and it is the Income
chargeable to Tax
Capital Gains Tax:
Capital Gain tax in India is imposed upon the profits earned on selling
capital assets and the tax calculated on capital gains is called as the tax on
capital gains or capital gain tax. There are two types of Capital Gains: 1)
short-term capital gains tax (STCG) and 2) long-term capital gains tax
(LTCG). To understand capital gains, we need to understand the concept of
capital assets.
Capital Assets:
Capital assets are the property which can be owned and transferred.
Ex: land, building, shares, patents, trademarks, jewelry, leasehold rights,
machinery, vehicles etc. Here is a list of capital assets that are not coming
under capital gain:
➔ The stock of consumables or raw materials held for use in business.
➔ Personal belongings which are meant for personal use like clothes,
furniture, etc.
➔ A piece of agricultural land is located in a rural area.
➔ Special bearer bonds, 6.5% gold bonds (1977), 7% gold bonds (1980) or
national defense gold bonds (1980) which have been issued by the
Central Government.
➔ Gold deposit bond (1999) which had been issued under the gold deposit
scheme or deposit certificate issued under Gold Monetisation Scheme,
2015 notified by the Central Government.
Types of Capital Assets:
Capital assets are divided into two types based on the period after
which they are sold off:
1. Short term capital assets
2. Long term capital assets
Short term capital assets:
Short term capital assets are those which are held for less than or
equal to 36 months. This means that if you sell off the asset within
36 months of buying it, the asset would be called as short term
capital asset. However, in some cases, the period of holding is
reduced to 24 months and 12 months. These cases include the
following:
● If the asset is an immovable property like land, building or
house then the period of holding would be considered to be 24
months. This means that if you sell off an immovable property
within 24 months of buying it, the property would be called a
short term capital asset.
● Similarly, equity shares of a company listed on the Recognized
stock exchange, securities listed on the Recognized stock
exchange, UTI units, Equity oriented mutual fund units and
zero-coupon bonds have a holding period of 12 months. If these
assets are sold off before 12 months of their purchase, they
would be called short-term capital assets.
Long term capital assets:
Long term capital assets are those which are held for more than
36 months and then sold off. Immovable property which is sold
after 24 months would be categorized as a long term capital
asset. In the case of equity shares, securities, mutual fund units,
etc., however, the holding period of 12 months is applicable. If
they are sold off after 12 months, they would be called long term
capital assets.
Capital Gains:
Capital gains are divided into two types:
1.Short term capital gains and
2.Long term capital gains.
Short Term Capital Gains (STCG):
Short term capital gains are the profits that you earn when you
sell off your capital assets before one year of holding those. Note
that the holding period varies as per the capital asset.
➔ When the security transaction is applicable: Short term capital
gain tax is 15%
➔ When a security transaction is not applicable Short term capital
gain tax will be calculated on the basis of the income of the
Taxpayers and would be automatically added in the ITR of the
taxpayer.
Long term capital gains (LTCG):
Long term capital gains (LTCG) are the profits that you earn when
you sell off your capital assets post one year. Note that the period
of holding for different assets to be claimed as long term asset
varies according to the asset.
➔ Long Term capital gain tax is applicable at 20% except on the
sale of equity shares and the units of equity-oriented funds.
➔ Long Term capital gains are 10% and above on the sales of
Equity shares and unit of equity-oriented funds.
Calculation of Capital Gains:
Calculation of capital gains depends on the type of capital gain
you are earning. Short term capital gains are calculated differently
than long term ones. However, before calculating the different
types of capital gains, we should understand the concept of the
full value of consideration.
Full value Consideration:
The full value of the consideration is, in simple terms, the money
that you would receive when you transfer your capital asset. In
technical terms, full value consideration is the consideration which
the seller has received or would receive in exchange for
transferring his capital asset.
Besides full value consideration, there are two other important
terms:
★ Cost of acquisition and
★ Cost of improvement.
Cost of Acquisition:
The Cost of acquisition is the cost price of the asset. It is the price
at which you bought the capital asset.
Cost of Improvement:
Cost of improvement is the money spent on the capital asset to
improve it. Cost of improvement is added to the cost of acquisition
to compute capital gains. However, if the cost of the improvement
is incurred before 1st April 2001, it would not be added to the cost
of acquisition.
Calculation of Short term Capital Gains:
The full value of XXXXX
consideration
Less: expenses incurred on XXXX
transferring the asset

Less: cost of acquisition XXXX

Less: cost of improvement XXXX
Short term capital gains XXXXX
Example:
Let’s understand it with an example. A house property was
bought on 1st January 2017 for INR 50 lakhs. On 1st January
2018, INR 5 lakhs was spent on making improvements to the
house. On 1st November 2018, the house property was sold for
INR 65 lakhs.
Since the house was sold after 22 months of buying it, it would
be categorized as a short term capital asset. The gain from
selling the house would be called short term capital gain and it
would be calculated as follows:
Calculation of Short Term Capital Gains :

The full value of consideration 65 lakhs

Less: cost of acquisition 50 lakhs

Less: cost of improvement 05 lakhs

Short Term Capital Gains 🡪 10 lakhs

Calculation of Long Term Capital Gains:
The full Value of Consideration XXXXX
Less: Expenses incurred in transferring the asset XXXX

Less: Indexed cost of acquisition XXXX

Less: Indexed cost of improvement XXXX
Less: Expenses allowed to be deducted from full XXXX
value of consideration
Less: Exemptions available under Sections 54, XXXX
54EC, 54B and 54F etc.
Long Term Capital Gains 🡪 XXXXX
Indexation of cost:
Indexation of cost is done to factor in inflation over the years
when the capital asset is held by us. Since inflation decreases
the value of money, indexation of the acquisition cost and
improvement cost increases, the amount of these costs thereby
lowering the capital gain earned. To calculate indexation, Cost
Inflation Index (CII) is used to account for the inflation incurred
over the holding period.
With effect from the last budget (presented on 1st February
2018), the base year for CII has changed from 1981 to 2001.
That is why, when calculating the indexed cost of acquisition,
CII of 2001-02 is taken into consideration if the asset was
purchased before the financial year 2001-02.
Financial year Cost Inflation 2011-12 184
Index (CII) 2012-13 200
2001-02 100
2013-14 220
2002-03 105
2014-15 240
2003-04 109
2015-16 254
2004-05 113
2016-17 264
2005-06 117 2017-18 272
2006-07 122 2018-19 280
2007-08 129 2019-20 289
2008-09 137 2020-2021 301
2009-10 148 2021-2022 317
2010-11 167
Example:
A house property was purchased on 1st January 2000, for
Rs.20 lakhs. On 1st January 2005, repairs were done on the
house which amounted to INR 5 lakhs. On 1st January 2018,
the house was sold for INR 75 lakhs. A brokerage was paid to
the broker which was INR 1 lakh. What would be the capital
gain amount?
Solution:
Since the asset has been held for more than 36 months, it is a
long term capital asset and the gain is a long term capital gain.
The capital gain would be calculated as follows:
Particulars Calculation Amount

The full Value of – 75,00,000

Consideration
Less: indexed cost of Cost of acquisition * CII of the year in which the 54,40,000
acquisition asset is sold / CII of the year in which the asset
was acquired = 20 lakhs * (CII of 2017-18 / CII
of 2001-02 since it is the base year)= 20 lakhs *
(272/100)
Less: indexed cost of Cost of improvement * CII of the year in which 12,03,540
improvement the asset is sold / CII of the year in which the
asset was improved = 5 lakhs * (CII of 2017-18 /
CII of 2004-05)= 5 lakhs * (272/113)
Less: brokerage paid – 1,00,000
Long term capital gain – 7,56,460
My heartfelt thanaks to our
Honourable Commissioner Sir of
Collegiate Education, Andhra
Pradesh for providing me valuable
opportunity.