A capital gain is one which you gain on the selling a property whose price got appreciated over the course of time. The amount you get on selling a property includes the invested amount and returns on it. These returns are the capital gain you make and it taxable in nature. Let us understand in detail;

What is capital Gain?
A capital gain is a profit made on selling a property or capital asset. This gain is categorized under the term Income and hence is taxable in nature. The taxation is done in the year in which the capital asset is transferred to the other party. This taxation can be both long or short term depending upon various factors like the amount of gain, etc.
Note: In case you have inherited a property, no capital gain tax would be imposed as there is only a transfer of property and no sale. There is a tax exemption for capital assets which are either inherited or are gifted. However, if you wish to sell the inherited property, the capital gain tax will hold good in case of appreciation.

What are capital assets?
Following are some of the things which come under capital assets:
1. Building
2. Land
3. Vehicles
4. House property
5. Trademarks
6. Patents
7. Leasehold rights
8. Jewelry
9. Machinery
10. Rights or in relation to an Indian company
11. Rights of management or control or any other legal right

Following do not classify as capital assets:
1. Stock, raw material, consumables held for professions or business
2. Clothes, furniture or other personal goods for personal use
3. Rural agricultural land in India
4. Gold bonds issued by central government- 61/2% Gold Bonds (1977), 7% Gold Bonds (1980) or National Defense Gold Bonds (1980).
5. 1991 Special Bearer Bonds
6. Gold deposit bond issued under the 1999 Gold Deposit Scheme
7. Deposit certificates issued under Gold Monetization Scheme 2015
Note: An area would be called rural if lies outside the jurisdiction of any cantonment board or municipality, has a population of 10,000 or more. It should also be restricted in terms of distance from the municipality or cantonment board as per the following terms:
1. Distance of 2KM from municipality or cantonment board if population is > 10,000 and < 1,00,000 2. Distance of 6KM from municipality or cantonment board if population is > 1,00,000 and < 10,00,000 3. Distance of 8KM from municipality or cantonment board if population is > 10,00,000

Classification of capital assets
There are two types of capital assets:
• Long-term
• Short-term

Short-term capital assets
These are the ones which are held for a period of 36 months or less. In case of immovable property like land, house, building, the tenure has been reduced to 24 months as on FY 2017-18.
If you happen to sell a house property after 31st March 2017, after holding it for 24 months, the income out of it will be considered as a short-term capital gain.

Long-term capital assets
These are the ones which are held for a period of more than 36 months. Movable property like Jewelry is not eligible for 24-month criteria.
Note: some assets may be considered as short-term capital assets f held for 12 months or less if the date of transfer is after July 10, 2014. These include:
1. Preference or equity shares in a stock exchange listed company
2. Debentures, bonds and other securities listed on a recognized stock exchange
3. Quoted or unquoted units of UTI
4. Quoted or unquoted units of Equity oriented mutual funds
5. Quoted or unquoted zero-coupon bonds

If you hold the above-listed assets for 12 months or more, they will then be categorized under long-term capital assets.

Taxation rules
Long-term capital gain
a. Except on sale of equity shares or equity-oriented funds- 20%
b. On sale of equity shares or equity-oriented funds- 10% over and above Rs. 1,00,000
Short-term capital gain
a. Non-applicability of securities transaction tax- gain is added to your ITR and you are taxed as per income tax slab
b. Applicability of securities transaction tax- 15%

Taxation rules for debt and equity mutual funds
debt and equity funds are taxed differently. Any fund which invests more than 65% in equities in their portfolio, it will be considered as an equity fund.
This taxation rule is as on 11 July 2014.
Debt funds
a. short-term gains: at normal tax slab rates
b. long-term gains: 20% with indexation
Equity funds
a. short-term gains: 15%
b. long-term gains: NIL

Taxation criteria for Debt mutual funds
there has been a change in rule for debt mutual fund taxation. In order to qualify as long-term capital assets, debt funds are to be held for at least 36 months. If you redeem these funds before 36 months or 3 years, the capital gains will be added to your income and taxed as per applicable slab rate.

How to calculate capital gain?
Long-term and short-term gains are calculated differently. Let us see how;

Calculating short-term capital gain
Step 1: know your full value of the consideration which is the consideration (amount) received from the buyer on the transfer of capital assets.
Step 2: make deductions as:
1. any expense incurred wholly and exclusively in relation to this transfer
2. acquisition cost
3. improvement cost
step 3: post deductions, the resultant amount is ‘Short-term capital gain’.

Calculating long-term capital gain
Step 1: know your full value of the consideration which is the consideration (amount) received from the buyer on the transfer of capital assets.
Step 2: make deductions as:
1. any expense incurred wholly and exclusively in relation to this transfer
2. indexed acquisition cost
3. indexed improvement cost
step 3: deduct exemptions under sections 54, 54B, 54F, 54EC, the resultant amount is long-term capital gain.

Other considerations
A) sale of house property
following are deductible from the sale price:
1. commission or brokerage paid to secure a purchaser
2. stamp paper costs
3. traveling expenses
4. in case of inheritance, costs relating to proceedings, cost of executor, succession certificate cost, etc.

B) sale of shares
following are deductible from the sale price:
1. broker’s commission

How to calculate the indexed cost of acquisition or improvement?
The indexed cost can be calculated by applying the cost inflation index as:
Indexed cost of acquisition = cost of acquisition * Cost Inflation Index of the year in which the asset is transferred / cost of inflation index of the year in which asset was first held by the seller or 2001-02 whichever is later.

Indexed cost of improvement = cost of improvement * cost inflation index of the year in which the asset is transferred / cost inflation index of the year in which improvement took place.

FAQs regarding Capital gains

Q1. Is indexation applicable to short-term capital asset gain as well?
No, indexation applies only to long-term capital assets only.

Q2. Is an NRI required to pay taxes on capital gains made in the sale of property in India?
Yes, if the property is sold in India, it is applicable for taxes. Please consult a jurisdictional assessing officer to determine the taxable gains.

Q3. What is the tax rate on long term capital gain on house property sale?
A 20% tax rate is applicable in long term capital gain on the sale of house property.