Capital gain is a fundamental concept, and not many individuals understand the intricate details about it. Before jumping on to know how we can calculate Long Term Capital Gain (LTCG), let us first know what we mean by capital gains.
In simple terms, the capital gain is the profit earned on the sale of any asset, either bonds, shares, real estate, stocks, etc. When the selling price of the asset exceeds the purchasing price, then it results in gains.
In easy terms, selling price > purchase price, the difference is known as the 'Gain.'
Capital gains can be both short-term and long-term. When the capital gain is long-term, the transaction of buying and selling takes place after 12 months. However, when buying and selling transactions that occur within 12 months will be a short-term capital gain.
In this thread, we will be discussing long-term capital gains in detail.
Intricate Details About Long-Term Capital Gain and its Calculation:
The assets you own may or may not be connected with your business or profession, known as capital assets. Some common capital assets include patents, trademarks, bonds, mutual funds, jewellery, etc. Above all, the furniture and clothes you use or rural agricultural land you own don't get counted under capital assets.
Ideally, long-term capital gain or LTCG tax is likely to be charged on profit generated from some support, including shares, bonds, real estate, or commodities that are expected to be held for a longer term.
However, the short-term or long-term period tends to be different for various assets as per Income Tax Act, 1961. Ideally, the long-term capital gain is mainly levied on capital gains on equity-oriented mutual funds or shares which are likely to be held for one year or more. The long-term capital gain is especially charged at 10% on income of more than 1 lakh in a given year, while short-term capital gains are set around 15% per year.
The capital gains are ideally profits generated from the sale of capital assets, and there are mainly two types of capital gains, including long-term and short-term. The long-term capital assets are held for at least 36 months or even more at times, while short-term capital assets are held for a short term. The capital assets tend to arise when people sell the capital asset for an amount higher than what they paid for. A capital loss is likely to occur if the prices for any of your assets fall below what you had bought for. A realised capital gain is expected to occur only when people sell their assets at a higher price than their original purchase price.
Tax on capital gains
In terms of calculating the tax based on these short-term capital gains, it is relatively straightforward than long-term gains. In terms of the short-term gains, there is an expectation that growth is likely to get added to overall revenue, and income tax is expected to be calculated on the tax bracket that people fall into. On the other hand, the calculation of long-term capital gain is a little challenging as long-term assets are likely to be held for a long time, and inflation factors also play a crucial role in the computation of the tax on long-term investments.
Capital gains calculator
You can calculate the capital gains tax by using the online tools designed to make calculation easy. When it comes to calculating the capital gains using the online tool, people need to enter the following information:
- Sale price.
- Purchase price.
- Details of the purchase including month besides date and year of the purchase.
- Sale details, including the date, month, and year of sale.
- Investment information includes real estate, gold, equity funds, fixed maturity, etc.,
Once people enter these details, the following information is likely to be generated in terms of their calculation towards capital gains:
- Sale price and purchase price difference
- The duration between the sale and purchase of transactions
- Without indexation - Long-term capital gain.
- Featuring indexation - Long-term capital gain.
- The type of investment.
- Type of gain, no matter short or long-term).
- Cost inflation index of the year they made the purchase.
- Cost inflation index of the year they made the sale.
Formula Calculation for Capital Gains
Short-term capital gains- total value consideration – (cost of acquisition + cost of improvement + transfer cost).
Long-term capital gains-full value of the consideration of an accruing or generated– (cost of acquisition (Indexed) + indexed cost of improvement + transfer cost.
How to calculate the capital gains tax with CII?
CII is also known as the cost inflation index, and it is mainly used to calculate the long-term capital gains tax. It is likely to be notified by a notice issued by the Income-tax department every year. For example, 3O1 is the CII for the financial year 2021-22. If you are calculating your capital gains, you need to use CII to ascertain the indexed cost of your acquisition.
During consideration, it is likely to be deducted from the entire value of the review. Hence CII is applied to the cost of acquisition, and due to which the figure is expected to become an indexed cost of acquisition.
When calculating the capital gains from transferring your long-term capital asset, your deduction can be claimed by indexing the cost of improvement and acquisition. For instance, Mr A bought some land in 2005 for Rs.1000000, and he elapsed after at least ten years, and in 2015, he sold the same for 3000000. Hence, the cost inflation index, also known as CII, will be the Index for 2014-15 divided by the Index for 2005-2006 and CII x Purchase Price. Hence the calculation part is simple. All you need to know is about some basics.
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Q. What is the long-term capital gain (LTCG) calculator?
Ans. The LTCG calculator is considered to be a very useful tool. This calculator helps ascertain the long-term capital gains and the tax liability of LTCG for different assets such as listed equity shares, mutual funds, which are equity-oriented, etc. The LTCG calculator displays the long-term or short-term capital gain, which primarily depends on the holding period.
Q. What is the working of the long-term capital gain (LTCG) calculator?
Ans. The working of the long-term capital gain (LTCG) calculator is pretty simple, and let us understand the same with the help of an example. Support person X purchases a total of 200 shares of 'XYZ' company at the rate of 1000 per share in 2018 May. Now suppose in 2020 January, Mr X sold the 200 shares at the rate of 1800. You can easily see a profit here of 800 INR per share (Selling price - purchase price = 1800-1000). In more than one year, Mr X made profits of (200*800 = - 200*1000) = 1.60,000.
Hence, Mr X. will be required to pay a long-term capital gain, which will be more than a lakh in a financial year. Mr. X will be required to pay a LTCG tax of 60,000 (1,60,000 - 1,00,000) @10%. This comes out to be 6,000 tax on the capital gain.
Q. How can we use the LTCG calculator?
Ans. First, you need to understand what is the relevance of the period when calculating LTCG through the calculator. Based on that:
- The period should be chosen when the shares are sold out, or the units of equity-oriented mutual funds should be mentioned.
- If you end up selecting before 31st March 2018, there will be no requirement for long-term capital gains on the investment you do. However, if you choose to do the investment post 1st April 2018, you will be eligible for the long-term capital gain.