What are Capital Gains as per Indian Income Tax Act and what are the documents required for calculating capital gains?


As tax season approaches, you’re going to need to compile all the information about your finances that you possibly can. Your yearly income isn’t the only thing you’ll need.

Capital gains are profits that an individual receives from an appreciation in the value of an investment.  To state that another way, capital gains are the difference between the sale price of an investment and the original purchase price of that investment.  The investment can be any kind of capital asset – usually stocks, bonds, or real estate.

Capital Gains is the difference in buying and selling an asset. In India if the asset is held for less than 365 days then it is considered short-term capital gains, while if the asset is held for more than 365 days before it is sold then, it will constitute long-term capital gains.

The tax levied on capital assets is called capital tax and it could be long term or short term based on the time for which an investor has held that assets. When you sell off your capital assets the capital gain from that sale is added to the income of the investor for the year in which transfer of the asset is done however if the capital asset is inherited then there is no tax applicable on the same as there is no sale involved only a transfer is done.

Short Term and Long Term Capital Asset:

Capital Gains Tax varies with the Capital asset being short term capital gains tax or long term capital gains. This depends on for how long an investor have held that property. As per Income Tax Act, a person must have held the property for at least 36 months before it could be classified as long term capital assets. However, if you have an immovable capital asset like land, house, building then this term was reduced to 24 months by Income Tax Act passed in year 2017-18 however for movable capital assets like jewellery, and debt oriented funds it is still 36 months.

Some assets like equities, securities, Units in UTI, Units of equity oriented mutual funds and zero coupon bonds are short term assets in case they are held for less than 12 months or else they are considered as long term capital assets.
When one acquires an asset in terms of gift, or inheritance then the period of it being possessed by previous owner is also added to the age of property to calculated whether it is under long term capital gains or short term capital gains tax.
From year 2017-18, one must hold the debentures for more than 36 months to be considered underlong term capital gains.

Income Tax Applicable on Long Term and Short Term Capital Assets:

Long Term Capital Assets are taxable at 20% on the net profit or long term capital gains made on its sale value. To calculate short term capital gains tax, the income from sale is added to investor’s income for the financial year and is income tax is applicable as per the income tax salary slab for that person or entity.

Capital gain constitute the following:

  1.  Sale and purchase deed of the property including stamp valuation of the property (forLand/building)
  2.  Documents for cost of improvement on the property (if improvement is done)
  3.  Stock statement in case of trading in shares etc. (specifying sale and purchase value of shares)
  4. In case of other capital asset, the cost of purchase, sale value and cost of improvement if any
  5. Details of expense incurred on transfer
  6.  Re-investment purchase deed for claiming exemption from Capital Gains
  7. Details of investment in Capital Gains Accounts Scheme (if applicable)

These documents can help to claim the following expenses as deductions –

 Life insurance premium payment

 Stamp-duty and registration charges in case you have bought a property

 Principal and interest repayment on your home loan

 Proof of any capital loss