What is Capital Gains Tax?
Capital Gains tax is the tax that an investor has to pay on the income earned from his investments in a given financial year. These include income from selling stocks, mutual funds, bonds etc.
There are two categories of capital gains:-
- Short Term Capital Gains - Gains earned from securities that were held for less than a year
- Long Term Capital Gains - Gains earned from securities that were held for a year or more.
Capital Gains Tax Structure
Following table summarizes the current capital gains tax structure:-
| Direct Equity | Mutual Funds | ||||
| Equity | Non Equity | ||||
| Short Term | Long Term | Short Term | Long Term | Short Term | Long Term |
| 15.45% = 15% + 3%* | Nil | 15.45% = 15% + 3%* | Nil | Applicable Income Tax Slab + 3%* | 10.30% (Without Indexation) = 10% + 3%* 20.60% (With Indexation) = 20% + 3%* |
* = Education Cess
Indexation helps in reducing the tax liability by taking into account the effect of inflation on the purchase price of a security.
Dividend Distribution Tax
Apart from Capital Gains tax there is tax implication on the dividend earned on held securities. Following table summarizes the dividend distribution tax:-
| Direct Equity | Mutual Fund | ||
| Equity | Debt Schemes | Money Market and Liquid Schemes | |
| Nil | Nil | 13.519% = 12.5% + 5%** + 3%* | 27.0375% = 25% + 5%** + 3%* |
* = Education Cess, ** = Surcharge
Capital Gains Tax Computation
Capital Gains Tax Computation is three step process.
1. Determining the holding period for the security
First step in calculating the capital gains tax is to determine the duration for which the security was held before it was sold. This is simple if there was only one buy and one sell transaction in a security. In this case it would simply be the difference between sell and buy dates. But when there are multiple buy and sell transactions in the same security then the principle of First In First Out (FIFO) has to be applied.
Lets try to understand using the following diagram
In the diagram above, there were three buy transactions and two sell transactions. First sell transaction occurred on 15-Jan-13. Shares sold under this transaction would be adjusted against shares bought on 15-Feb-12. Since the holding period for these shares was 11 months therefore, it would be considered as short term capital gain. Second sell transaction of 100 shares happened on 15-Mar-13. Now first 50 shares out of the 100 would be adjusted against 50 shares bought on 15-Feb-12. Since holding period for these was 13 months, therefore, it would be considered as long term capital gain. Second 50 would be adjusted against 50 shares bought on 10-May-12. Since holding period for these was 10 months, therefore, they would be considered as short term capital gains.
2. Computing the Capital Gains
After computing holding periods for all the security transactions we would compute the capital gains earned for each of the transaction. Following table summarizes the capital gains earned in the example above.
| Sell Transaction Date | Corresponding Buy Transaction Date | Holding Period | Capital Gain Type | Capital Gain |
| 15-Jan-2013 | 15-Feb-12 | 11 Months | Short | 50 * 350 – 50 * 200 = 7500 |
| 15-Mar-2013 | 15-Feb-12 | 13 Months | Long | 50 * 400 – 50 * 200 = 10000 |
| 15-Jan-2013 | 10-May-2012 | 10 Months | Short | 50 * 400 – 50 * 250 = 7500 |
3. Computing Tax Liability
| Financial Year | Capital Gain Type | Capital Gain | Tax Liability |
| 2012-13 | Short | 7500 + 7500 = 15000 | 15000 * 0.15 = 2250 |
| 2012-13 | Long | 10000 | Nil |
Same procedure can be applied for all the instruments held in the portfolio to determine the capital gain type and the actual capital gain tax for the overall portfolio.
I hope this would help the investors in clarifying the tax calculations for their portfolio.
