Long-term Capital Gains Tax:
Conversely, if you are selling an asset other than short-term capital assets, they are referred to as long-term capital assets and the profit or gain over the sale of such an asset will be termed as long-term capital gain. Accordingly, you must calculate tax on this gain.
It is important to note that calculating capital gains tax is not just about subtracting the purchase price from the sale price. For example, if you bought a property for ₹1 crore and sold it for ₹1.4 crore, your taxable gain is not automatically ₹40 lakh. This is because the law allows you to deduct certain expenses related to buying, improving, and selling the asset before calculating the final taxable gain.
So, in addition to the indexed cost of acquisition, you will consider:
Cost of Improvement: If the property owner has incurred expenses after acquisition to renovate, upgrade, or improve the asset, such costs are allowed as deductions while calculating capital gains. In other words, that sum will be deducted from the profit amount before calculating tax.
For short-term capital gains, the actual amount you spent on improving the property is deducted as it is. However, for long-term capital gains, the law allows you to adjust this cost for inflation. This is called the Indexed Cost of Improvement. It increases your original expense to reflect rising prices over time, which reduces your taxable gain.
Formula:
Indexed Cost of Improvement = (Cost Inflation Index for year of sale or transfer × Cost of asset improvement)/ Cost Inflation Index for year during which the asset improvement took place
- Expenses on Transfer: When selling an asset, you may incur several expenses, such as brokerage, legal fees, registration charges, stamp duty, or travel costs related to finding a buyer. All such genuine expenses directly connected with the sale of the asset can be deducted from your sale value before calculating capital gains.
- Exemptions in Capital Gains Tax: Similar to income tax, certain basic exemption limits can reduce your capital gains tax. Some of these are:
If the seller is a resident individual, the following basic exemption limits can be adjusted against total income (including capital gains), after considering other income, as per the old tax regime:- ₹2.5 lakh per year for individuals below 60 years
- ₹3 lakh per year for senior citizens (60-79 years)
- ₹5 lakh per year for super senior citizens (80 years and above)
Under the New Tax Regime, the basic exemption limit is generally ₹4 lakh for all age groups and ₹3 lakh for taxpayers aged 60-80, meaning income (including capital gains) up to this amount may be effectively tax-free due to rebates and slab structure.
However, if the seller is a Non-Resident Indian (NRI), this basic exemption limit generally cannot be used to reduce tax on capital gains taxed at special rates under the Income Tax Act. Capital gains for NRIs are usually taxed separately at prescribed rates.
Also Read: Capital gains accounts scheme
