Computing capital gains can be a complex and challenging task depending on the nature and the number of transactions undertaken by the assessee in a financial year. It is always advisable to take the help of an expert like a chartered accountant for the same. However, if the assessee goes by the proper step by step methodology, then he can compute his own capital gains. Here’s how to do-it-yourself.
Capital gains arise whenever a capital asset is transferred (by way of sale or otherwise) by the assessee. They are further classified into two: short-term capital gains (STCG) and long-term capital gains (LTCG) on the basis of asset’s holding period
A standard format has been provided under the Income tax Act, 1961 for calculating LTCG and STCG (see below):
If the assessee can try and understand the meaning of each term in the above format, he can easily compute his own capital gains.
UNDERSTANDING EACH TERM
Sale value: It is the value received or receivable on the capital asset sale. In the case of a property, if the actual sale price is less than the stamp duty value (SDV) of the property, then the SDV is taken as the sale value. In the case of equity shares or mutual fund (MF) units, the gross selling price (excluding the brokerage charges and securities transaction tax or STT is considered as the sale value.
Cost of acquisition: It is the purchase price of the asset which has been sold. The brokerage charges paid to buy the asset have to be included in the purchase price.
In case the sold asset was acquired as a gift, then the cost of acquisition will be the same as the cost of acquisition in the hands of the person who gifted the said asset. Make sure that the holding period starts from the date when the said asset was purchased by the person who gifted it.
Cost of improvement: It is the money spent on major repairs or modifications of the asset. A whitewash, however, will not be counted as a cost of improvement, whereas money spent on major modifications, like constructing a floor or an additional room, will qualify as cost of improvement.
Also, the money paid by the landlord to the tenant to get the house vacated can be taken as cost of improvement.
Expenditure in connection with transfer/sale: It includes brokerage charges, registry charges or other expenses made on the asset sale. In equity shares and units of equity oriented mutual funds where STT is charged on sale transaction, the STT charges can’t be deducted while computing capital gains.
Indexation: The concept of indexation is applicable in the case of LTCG only. Indexation is done to incorporate the time value of money (adjusting the inflation factor) while computing the gains so as to make the computation just and fair. Indexation is done by using Cost Inflation Index (CII). The rules for applying indexation on capital gains computed in FY 17-18 have changed, however, while computing indexed capital gains for FY-16-17, the rules provided in below mentioned link would continue to apply.
For FY 17-18, the indexation procedure remains same, however, the Cost Inflation index table has changed because the base year has been shifted from 1.4.1981 to 1.4.2001.
Click here to learn how to apply indexation in case of LTCG
Holding period: It is calculated as the number of days or months for which the asset is/was held by the assessee. The period starts from the date on which the asset was acquired by the assessee and ends on the date immediately preceding the date of transfer of the asset.
In other words, the date on which the asset is transferred is not to be included when computing the holding period. This time period classifies the nature of gains as short-term or long-term.
The table below shows the minimum period of holding which would classify a capital asset as long-term(applicable for FY 16-17).
However, the period of holding for some asset classes would change for when calculating capital gains for FY 17-18
Other points to note
In case the transfer price of the capital asset is less than the price at which it was acquired, then the resultant amount would be termed as “loss under the head capital gains”, and depending on the holding period, it would be long-term capital loss (LTCL) or short-term capital loss (STCL).
Finally, add all LTCG arising from transfer of different capital assets and do the same for all STCG, LTCL and STCL too.
Please note that the following items are not considered as capital assets and any profit or loss on their sale is not subject to capital gains:
* Stock in trade or raw materials held for the purpose of business or profession.
*Items kept for personal use like television, air conditioner, furniture, etc.
*Rural agricultural land.
*Gold deposit bonds notified by the government.
*Silver utensils, only if they are kept as a personal use item, like thalis, katoris, etc.