Capital gain is one of the heads of sources of income for an individual, but it is also the head about which an individual knows the least. Various exemptions, computation and carry forward and set off of losses of this capital gain tax head is not known in general, due to which many people are unable to get the maximum benefits available under this head. This article focuses on the way to compute long term and short term capital gain and derive the best possible use of provisions in this head.

1. Capital Gains

When any income is derived from sale of any movable or immovable assets, it is taxable under head capital gains under the Income Tax Act, 1961. Capital gain tax is divided into two categories, long term capital gains and short term capital gains.

2. Short Term Capital Gain Tax

Short term capital gain arises when and individual has sold the capital assets within 36 months and shares and securities within 12 months of its purchase. Short term capital gain arises when the cost of acquisition of asset and expenses related to sales are deducted from the consideration received and a positive figure is arrived. In case negative figure arises, then it is short term capital loss. The short term capital gain is included in the total income of the individual.

3. Long Term Capital Gain Tax

Long term capital gain arises when the capital asset which held for more than 36 months and shares and securities held for over 12 months is sold. Long term capital gain is arrived at after deducting therefrom the indexed cost of acquisition and expenses on sales from consideration received. If the derived figure is positive, then it is long term capital gain and if negative then it is long term capital loss.

4. Taxation

Long term capital gain is taxed at flat rate of 20%. Long term capital gain in case of shares which are sold through recognized stock exchange and on which securities transaction tax is paid, is exempt from tax.
Short term capital gain is added to the income of the individual and taxed at normal rates of taxation, according to slab rates specified. Short term capital gain on shares and securities which are sold through a recognized stock exchange and on which securities transaction tax is paid is taxed @10% under section 111A.
Education cess of 3% is applicable in both the cases.