When any profit is earned at selling of any assets or investment then it shall be called as capital gain.  Capital gain involves the transaction relating to fixed assets and investments.

The capital gain may be divided into two parts:-

(a) Short Term Capital Gain:- When the shares of any company or units of any mutual funds are sold or transferred before twelve months from the date of purchase and any profit generated from this sale is called short term capital gain. In case of assets other than shares or units of mutual funds, which are sold before the expiry of 36 months from the date of purchase of assets, it will be treated as short term capital gain.

For example M/s XYZ Limited purchased a Plot on 01.05.10 for Rs. 5 lac and they sold the same on 15.06.11 for Rupees 6 lac then the gain for Rupees one lac shall be treated as short term capital gain since the period of holding of machinery is less than 36 months.

(b) Long Term Capital Gains:– On the contrary of the short term capital gain, if the shares and units of mutual fund are sold after the expiry of 12 months from the date of purchase and other assets are sold after the expiry of the 36 months and any profit earned on the sale of the asset will be called as long term capital gain.

For Example:- M/s ABC Limited invested Rupees 10 lac in mutual funds on 01.06.10 and they sold the mutual funds on 15.8.12 for Rupees for 15 lac. The profit earned on the mutual funds shall be treated as long term capital gains since the holding period of units is more than 12 months.

Please note that the assets on which the depreciation is charged and if these assets are sold for the value more than written down value of the assets, then the profit on the sale of these assets will be treated as business profit.

Accounting Treatment of Capital Gain

Capital gains is not the part of profit and loss account. Therefore, it will be shown separately at the time of calculation of gross earning for the purpose of income tax liabilities.