Capital Gains Tax (CGT)

This page provides all the details you need to know about the Capital Gains Tax (CGT).

 

Table of Contents

 

Capital Gains Tax

If you sell a capital asset and incur profit, then it is called Capital Gain (CG).

You have to pay income tax on the capital gain amount and this is called Capital Gains Tax (CGT).

If you sell a capital asset and incur loss, then it is called Capital Loss (CL).

 

Capital Asset

For the calculation of capital gains tax, the following capital assets are considered.

  • Listed Shares

  • Unlisted Shares

  • Equity Mutual Funds

  • Debt Mutual Funds

  • Real Estate

  • Gold

  • Listed Bonds

  • Zero Coupon Bonds

  • Other capital assets, if any

 

Types of Capital Gain

The following are the types of capital gains.

Gain:

  1. Short Term Capital Gain (STCG)
  2. Long Term Capital Gain (LTCG)

Loss:

  1. Short Term Capital Loss (STCL)
  2. Long Term Capital Loss (LTCL)

 

Determination of Capital Gain

Whether a capital gain is short term or long term is determined by the following.

  • Asset type

  • Holding period

Holding period means how long you keep the asset with you before you sell it.

For example, if you sell an equity mutual fund unit before an year of purchase, then it will qualify for short term capital gain.

If you sell after an year of purchase, it will qualify for long term capital gain.

The following table describes various assets and their holding period for short term and long term capital gains.

Asset Type

Holding Period for Short Term Capital Gain 

Holding Period for Long Term Capital Gain 

Shares - Listed 

Selling before 1 year 

Selling after 1 year 

Shares - Not Listed 

Selling before 1 year 

Selling after 1 year 

Equity Mutual Funds 

Selling before 1 year 

Selling after 1 year 

Debt Mutual Funds 

Selling before 3 years 

Selling after 3 years 

Real Estate 

Selling before 2 years 

Selling after 2 years 

Gold 

Selling before 3 years 

Selling after 3 years 

Listed Bonds 

Selling before 1 year 

Selling after 1 year 

Zero coupon Bonds 

Selling before 1 year 

Selling after 1 year 

 

Capital Gains Tax Percentage

The short term and long term capital gains tax percentage for various asset types are given below.

Capital Asset 

Short Term Capital Gains Tax 

Long Term Capital Gains Tax 

Shares - Listed 

15% 

No tax (0%) on gains up to Rs. 1 Lakh.  
After that, gains is taxed at 10% (without indexation) 

Shares - Not Listed 

15% 

20% with indexation 

Equity Mutual Funds 

15% 

No tax (0%) on gains up to Rs. 1 Lakh.  
After that, gains is taxed at 10% (without indexation) 

Debt Mutual Funds 

Gains added to income and  
taxed as per Tax slab 

20% with indexation 

Real Estate 

Gains added to income and  
taxed as per Tax slab 

20% with indexation 

Gold 

Gains added to income and  
taxed as per Tax slab 

20% with indexation 

Listed Bonds 

Gains added to income and  
taxed as per Tax slab 

10% (without indexation) 

Zero coupon Bonds 

Gains added to income and  
taxed as per Tax slab 

10% without indexation or 
20% with indexation,  
whichever is lower 

 

Calculation of Capital Gain

To calculate capital gain or loss, we need the following details.

  • type of asset

  • purchase price

  • purchase expenses

  • purchase date

  • improvement price

  • improvement date

  • sold price

  • sold expenses

  • sold date

 

Short Term Capital Gain or Loss:

Short term capital gain or loss is calculated in the following way.

sold price (minus)
sold expenses (minus)
purchase price (minus)
purchase expenses (minus)
improvement price

 

Long Term Capital Gain or Loss:

Long term capital gain or loss is calculated in the following way.

sold price (minus)
sold expenses (minus)
indexed purchase price (minus)
indexed purchase expenses (minus)
indexed improvement price

 

Offset (Adjust) Capital Loss

If you sell a capital asset and incur loss, then it is called capital loss. You need not pay any capital gains tax on the loss amount.

The Income Tax department gives you an option of offsetting (or adjusting) the capital loss against a capital gain.

It means that you can use capital loss to reduce the amount of tax to be paid on the capital gain.

Note: Capital loss can't be offset against any income under the head "Income".

 

Example 1:

You had a capital gain of Rs. 10,000 from a sale of a capital asset. Also, you had a capital loss of Rs. 6,000 from a sale of another capital asset.

Now, you can offset (adjust) the loss of 6,000 against the gain of 10,000. That is, 10,000 minus 6,000

After offsetting, you will have

capital gain = Rs. 4,000
capital loss = Rs. Zero

So, you need to pay capital gains tax only on Rs. 4,000.

 

Example 2:

You had a capital gain of Rs. 6,000 from a sale of a capital asset. Also, you had a capital loss of Rs. 10,000 from a sale of another capital asset.

Now, you can offset the loss of 10,000 against the gain of 6,000. So, you will now have a capital loss of 4,000 (That is 6,000 minus 10,000)

After offsetting, you will have

capital gain = Rs. 0 (Zero)
capital loss = Rs. 4,000

Now, you need not pay any capital gains tax on the gains or losses.

 

Rules about Offsetting Capital Loss

There are some rules about offsetting capital loss against capital gain. They are given below.

  •  A capital loss should be offset against capital gain only. It should not be offset against any income

  • A short term capital loss (STCL) can be offset against short term capital gain (STCG) or long term capital gain (LTCG)

  • A long term capital loss (LTCL) should be offset against only long term capital gain (LTCG)

 

Carry Forward Capital Loss

There may be situations where you can't offset the capital loss against any capital gain. In this case, you can carry forward capital loss to the next financial years.

During the next financial year, you can try to offset the capital loss against capital gain, if any.

If you are still unable to offset, then you can still carry forward to the next financial year.

This way, you can carry forward capital loss to a total of 8 financial years.

 

For this, you will need to do the following.

  1. File Income Tax returns with the capital loss mentioned in it

  2. Keep the tax file returns safe

  3. During the next financial year(s), use the previous year's tax returns and try to offset capital loss

 

Indexation

Indexation is the process of increasing the purchase price along with inflation. It helps to reduce the amount of tax to be paid on the capital gain.

Note that improvement price can also be indexed. But, sold price can't be indexed.

Example:

Let us assume that you purchased a property for Rs. 10 Lakhs during the FY 2010-11. You sold that property for Rs. 25 Lakhs during the FY 2017-18.

Capital gain amount is 15 Lakhs (That is 25 Lakhs minus 10 Lakhs)

You have to pay a long term capital gains tax on Rs. 15 Lakhs.

But, the Income Tax (IT) department feels that it may not be a good idea to calculate capital gain based on the original purchase price as it will take away majority of the profit from the investor. So, the IT department wants you to pay tax only for the gain that are above the inflation. So, you will get an option of increasing the purchase price based on inflation called CII (Cost Inflation Index).

By applying CII on the purchase price of 10 Lakhs, the indexed cost can be calculated as Rs. 18 Lakhs. The details about how to calculate indexed cost are given in the next section.

Now, capital gain is calculated as

Capital gain = Sold price (minus) indexed purchase price

Capital gain = 25 Lakhs minus 18 Lakhs
Capital gain = 7 Lakhs

Now, you have to pay LTCG tax on Rs. 7 Lakhs only (as opposed to 15 Lakhs we calculated without indexation). Indexation reduced your tax on 8 Lakhs.

 

How to Calculate Indexed Price?

To calculate the indexed price, we need the following details.

  1. Purchase price

  2. CII (Cost Inflation Index) of the financial year in which the asset was purchased

  3. CII (Cost Inflation Index) of the financial year in which the asset was sold

 

The indexed price is calculated using the following formula.

Indexed Price = Purchase Price X (CII for the sold financial year / CII for the purchased financial year)

 

Example:

You purchased a property for Rs. 10 Lakhs during the financial year 2010-11 and sold it during the financial year 2017-18.

From the above example, we can collect the following details.

  1. Purchase price is Rs. 10 Lakhs

  2. CII (Cost Inflation Index) for the FY 2010-11 is 167

  3. CII (Cost Inflation Index) for the FY 2017-18 is 272

Now, you can apply the above formula to calculate the indexed price.

Indexed purchase price = 10,00,000 x (272 / 167)

Indexed purchase price = Rs. 16,28,743/-

Note: The above method can be used to calculate the indexed price of improvement price as well. It means that the improvement cost can also be indexed.

 

CII - Cost Inflation Index

CII stands for Cost Inflation Index.

CII is the inflation index announced by the Government of India every financial year.

We need to use this inflation index to calculate the indexed cost.

The inflation index chart for various financial years is given in the next sections.

 

CII Table for Base year 1981

The CII (Cost Inflation Index) table for the Base year 1981 is given below.

This table contains the Cost Inflation Index from the financial year 1981-82 to the financial year 2016-17.

Earlier, this table was used to calculate the indexed price of a capital asset. Since the Government of India has introduced a new "Base Year 2001" table in Budget 2017, this table can now be used only to calculate the indexed price of a capital asset that was purchased before 01-Apr-2001.

Financial YearCost Inflation Index
1981-82100
1982-83109
1983-84116
1984-85125
1985-86133
1986-87140
1987-88150
1988-89161
1989-90172
1990-91182
1991-92199
1992-93223
1993-94244
1994-95259
1995-96281
1996-97305
1997-98331
1998-99351
1999-2000389
2000-01406
2001-02426
2002-03447
2003-04463
2004-05480
2005-06497
2006-07519
2007-08551
2008-09582
2009-10632
2010-11711
2011-12785
2012-13852
2013-14939
2014-151024
2015-161081
2016-171125

 

CII Table for Base year 2001

The CII (Cost Inflation Index) table for the Base year 2001 is given below.

This table contains the Cost Inflation Index from the financial year 2001-02.

This table was introduced by the Government of India in Budget 2017 and it became effective from 01-Apr-2017 onwards.

This table can be used to calculate the indexed price of a capital asset that was purchased after 01-Apr-2001.

Financial YearCost Inflation Index
2001-02100
2002-03105
2003-04109
2004-05113
2005-06117
2006-07122
2007-08129
2008-09137
2009-10148
2010-11167
2011-12184
2012-13200
2013-14220
2014-15240
2015-16254
2016-17264
2017-18272
2018-19280
2019-20289
2020-21301
2021-22317

 

Capital Gains and Tax Exemption Limit

This section provides you the details about the relation between capital gains tax and the tax exemption limit.

There is an option to reduce the capital gains tax to be paid on the following capital gains.

  1. Short term capital gains from Equity mutual funds (taxed at 15%)

  2. Short term capital gains from listed Shares (taxed at 15%)

  3. Short term capital gains from unlisted Shares (taxed at 15%)

  4. Long term capital gains from any capital asset

 

The option is as per the following.

If your taxable income is below the tax exemption limit, then the above capital gains can be reduced by the amount your taxable income falls short of the tax exemption limit.

 

Example:

You are a salaried individual and you are less than 60 years of age. Your taxable income is Rs. 2 Lakh. That is, after applying exemptions and deductions. You earned a short term capital gain of Rs. 75,000 by selling equity mutual fund units.

Short term capital gain from equity mutual funds are taxed at 15%. You have to pay 15% tax on Rs. 75,000.

But, your taxable income is only Rs. 2 Lakh. That is, it is Rs. 50,000 less than the tax exemption limit of Rs. 2.5 Lakh.

So, you can use the difference of Rs. 50,000 to reduce the capital gain amount. So, your taxable capital gain amount will be reduced from 75,000 to Rs. 25,000. That is, 75,000 minus 50,000.

Now, you have to pay capital gains tax of 15% on Rs. 25,000 only.

Note:
You can't adjust short term capital gain from assets other than the ones listed above.