Basic Concepts

Capital gain is the profit earned when a capital asset is sold for an amount higher than its cost of acquisition, after adjusting for permissible expenses. In the Indian context, the term is defined by the Income Tax Act, 1961 and is a taxable event for individuals, firms and trusts.

The concept matters for the exam because every transaction a client undertakes—whether in equities, debt, real estate or mutual funds—may generate a capital gain or loss, which directly influences the client’s tax liability and the adviser’s recommendation.

Exam questions often present a sale scenario and ask you to calculate the gain, classify it as short‑term or long‑term, and indicate the applicable tax rate. Remember that a loss can be set off only against gains of the same head, another key point for scoring marks.

• Capital gain = Sale consideration – (Cost of acquisition + Cost of improvement + Expenses incurred on transfer)
• Capital loss = Sale consideration – (Cost of acquisition + Cost of improvement + Expenses) when the result is negative.

Capital gains are split into short‑term capital gains (STCG) and long‑term capital gains (LTCG) based on the holding period of the asset before it is sold. The holding period varies by asset class as prescribed by SEBI and the Income Tax Act.

For listed equity shares and equity‑oriented mutual funds, the holding period is 12 months: a sale within 12 months creates STCG, while a sale after 12 months creates LTCG. For listed debt securities, the threshold is 36 months. Unlisted assets such as land, building or gold have a 24‑month rule for STCG/LTCG classification.

Why this matters for the exam: the tax rate applied to the gain depends entirely on the classification. STCG on listed equities is taxed at a flat 15% (plus surcharge and cess), whereas LTCG may be taxed at 10% after exemption of ₹1 lakh, subject to indexation for non‑equity assets.

To compute a capital gain, the Income Tax Act requires you to subtract the total cost of acquisition, cost of improvement and any expenses incurred on transfer from the sale consideration. This calculation is the same for both short‑term and long‑term gains; the only difference appears later when tax rates are applied.

The components are defined as follows: Sale consideration is the total amount received from the buyer, including any cash, securities or other assets. Cost of acquisition is the purchase price plus any brokerage, stamp duty or registration fees paid at the time of purchase. Cost of improvement includes expenses that increase the value of the asset, such as renovation for real estate. Expenses on transfer cover brokerage, legal fees and stamp duty paid at the time of sale.

Exam questions may provide some of these values and ask you to compute the net gain. Ensure you include every permissible expense; omitting even a small brokerage fee can lead to a wrong answer and loss of marks.

When a capital asset is held for the long‑term period, the tax law allows the investor to adjust the cost of acquisition for inflation. This process is called indexation and uses the Cost Inflation Index (CII) published by the Central Board of Direct Taxes each financial year.

The indexed cost of acquisition is calculated by multiplying the original purchase cost by the ratio of the CII of the year of sale to the CII of the year of purchase. The higher the inflation over the holding period, the larger the indexed cost, which reduces the taxable gain.

For the exam, you must remember the formula and be able to apply it with given CII values. The CII values are not memorised; they are provided in the question stem. Forgetting to index a long‑term gain on real estate or debt securities is a common mistake that leads to overstated tax liability.

Once the capital gain is computed, the applicable tax rate depends on the classification and the asset type. For listed equity shares and equity‑oriented mutual funds, short‑term gains are taxed at a flat 15% (plus surcharge and cess) irrespective of the investor’s income slab. Long‑term gains on these assets attract a 10% tax if the gain exceeds ₹1 lakh in a financial year, also subject to surcharge and cess.

For non‑equity assets such as real estate, debt mutual funds, or unlisted securities, short‑term gains are added to the taxpayer’s total income and taxed at the applicable slab rate. Long‑term gains are taxed at 20% after indexation, again with surcharge and cess. The exam frequently asks you to select the correct rate based on the scenario provided.

Always remember that the Finance Act may amend rates each year; the NISM syllabus expects you to know the prevailing rates at the time of the exam, typically the rates in effect for the most recent Finance Act.

All capital gains must be disclosed in the Income Tax Return (ITR) under Schedule CG. The taxpayer needs to provide details such as asset description, date of acquisition, date of sale, sale consideration, cost of acquisition, indexed cost (if applicable), and the resulting gain or loss.

Supporting documents—contract notes, broker statements, and proof of expenses—should be retained for at least six years as per Section 139(3) of the Income Tax Act. Failure to maintain these records can attract penalties during an audit.

For the exam, you may be asked to identify the correct schedule or to select the documents required for verification of a capital gain claim. Knowing the reporting flow helps you answer scenario‑based questions accurately.