Capital gains computation in Tally is one of the most debated issue on the web, especially when it comes to capital gains arising from trading of stocks and other similar financial instruments.
There are several add-ins which you can buy with the help of which you can easily compute capital gains in Tally.
But the problem is, they are costly and everyone cannot afford it.
Or you just don’t want to buy it. 😕
Let me directly come to the point.
Today you are going to learn in the following post, the computation of capital gains in case of stocks and other similar financial instruments.
In fact, you can apply the method to calculate capital gains arising from any type of asset.
Capital losses can also be calculated by this method.
Note: In this post you will learn passing entries as if stock market is your investment as per Income Tax Law. If stock market is your daily business, you should see this post on Stock Market Entries for business in Tally.
What is Capital Gains
Capital gains is a concept of Indian Income Tax Act, 1961 and probably every other income tax law in the world.
It literally means gains arising from transacting in capital assets.
Now, you must be thinking, what is a capital asset?
Capital Asset means big things like investments, house, shop, mobiles (at least now a days), building, furniture and so on.
In simple words, usually a big thing which is of more value is a capital asset.
Capital gains only arise when you have an investment and not in case of trading of shares in the course of your business (that would be business income).
In this case capital gains arises from selling of shares because we are discussing capital gains on shares.
Therefore capital gains will be reflected in Balance Sheet and no effect will arise in the Profit and Loss account.
And that is the reason I’ve NOT integrated accounts and inventory.
Because inventory details will give you overall report with the help of which capital gains entries will be passed.
You can do that by pressing F11 from the Gateway of Tally.
Then select Accounting Features.
Go to General and set No in the first option i.e. Integrate Accounts and Inventory
As per Income Tax Act, 1961, there are two types of capital gains.
- Long term capital gain – Arises when you purchase and sell shares after 12 months.
- Short term capital gain – Arises when you purchase and sell shares within 12 months.
By now, I am sure that you have understood what are short and long term capital gains.
This will make easier for you to understand this tutorial.
Ledgers required for this Capital Gains in Tally
Other than that, I’ve already created certain ledgers like:
If you don’t know how to create ledgers in Tally, here is a complete explanation along with the video tutorial.
- Share Purchase under Stock Investment which is under Investments
- Share Sale under Stock Investment which is under Investments
- Stock Broker under Sundry Debtors
- Share Brokerage under Capital Account
- Long Term Capital Gain under Capital Account
- Short Term Capital Gain under Capital Account
- Reliance (scrip for giving example in the video) under Stock Investment which is under Investments
And, lastly I have used the Simple Tally Trick of opening two windows of Tally at a time for saving a big amount of time by not coming in and out just for passing entries.
Entries required for Capital Gains in Tally
As you have read earlier that capital gains arises on sale of a capital asset and in our case, we have shares as an investment.
As we are discussing about shares I have passed a certain entries for shares purchases and sales.
I will show you step by step what entries I have passed and how I calculate capital gains in Tally.
This is the share purchase entry which is pretty simple to understand.
In this example, I have purchased 15 shares of Reliance for ₹15,000 on 1st April, 2016 and paid stock brokerage.
Now, I have sold 8 shares of Reliance for ₹12,000 on 31st May, 2016 and paid the share brokerage of ₹120.
Again, I have sold 2 shares of Reliance for ₹3,200 on 1st June, 2016 and paid the share brokerage of ₹32.
One more time, I have sold 5 shares of Reliance on 31st May, 2017 and paid share brokerage of ₹85.
Please note that this time, I have sold the shares in 2017 and NOT 2016.
This is because I wanted you show both short term and long term capital gains.
I have explained earlier that more 12 months period results in long term capital gain.
Although, both the entries are same but still for the purpose of clear explanation, I will explain it to you both of them step by step.
These were the entries required for calculating capital gains in Tally.
Now we will look at how to calculate the capital gains as per the Income Tax Act, 1961 in Tally.
Calculation of Capital Gains in Tally
Calculation of capital gains is easy in Tally because you just have select certain options and Tally will automatically calculate the gains.
As per the Indian Income Tax Act, 1961, either FIFO (First in First Out) method is used or WAM (Weighted Average Method) is used.
But, FIFO is used in 99% of cases therefore in this post I am going to talk about calculation of short term and long term capital gains in Tally.
Now that we have passed the entries for shares, we will look into the calculation of capital gains in Tally.
From Gateway of Tally, go to Stock Summary.
The following screen you will see will be the the Stock Summary.
Here is the screen in the picture below.
As you can see there are no entries in the screen.
This is because Tally does not automatically show the entries for which there is no stock.
Note that we have purchased 15 shares of Reliance and we have sold 15 (8+2+5) shares and therefore we do not have any stock.
Now, we have to select certain options and so we will have all the details which are required for calculating capital gains in Tally.
Firstly you have to press F7, which is a shortcut for Showing Profit in Stock Summary. It will also show losses if there are any in negative here.
The Stock Summary screen after pressing F7 will look like in the picture below.
You can now see that there are two columns, which are:
Outwards and Closing Balance
But still there is no information about the capital gains which we have by selling the shares.
This is because, Tally does not automatically show you the shares which are sold out and therefore we have select yet another option in Tally.
It is called Configuration. You can go to it by pressing F12.
And the following options will appear on screen.
In this menu, you have to set Yes for the option – Show all Items (incl. zero balance).
Because of this, Tally will show all the entries even when there is no stock i.e. zero balance.
Also, set Yes to all the options till Show all Items (incl. zero balance) as you will require them to have a good picture for the purpose of calculation of capital gains as well as the profits.
After configuring these settings you will see a screen with the calculations as shown in the picture below.
Did you note that there is nothing in the Opening Balance and the Closing Balance column?
Because we have no opening balance of Reliance and we sold all the shares before the end of the period.
You can clearly see that there is Gross Profit of ₹8,700 which is 36.71% of the total investment.
But for the Income Tax purposes we will have to calculate the gains as per FIFO so we have to select FIFO in Tally.
For selecting FIFO in Tally, you have press ALT+C, while in Stock Summary.
ALT+C is the shortcut for New Column in Stock Summary.
In this option, you will have to select FIFO Perpetual and NOT FIFO.
Here is the picture for clear understanding of what you have to do.
FIFO Perpetual means FIFO throughout all the periods for which you will have accounting entries.
On the other hand FIFO alone means FIFO for a particular accounting period and therefore we always choose FIFO Perpetual especially for the income tax purposes.
Accounting period usually starts from 1st April and ends on 31st March of the next year.
Now we have the exact calculation which is required for calculating capital gains as per the Indian Income Tax law.
After selecting FIFO Perpetual, you will see the screen as shown in the picture below.
You can clearly in the red rectangle that the method is FIFO Perpetual.
The gains have not changed because we only have one share only 3 entries so it is very much simple.
But if you have more entries and more shares, the gains in both the methods will change and it would be usually a bit higher in FIFO Perpetual.
Now we will pass the entry for capital gains in Tally.
Short and Long Term Capital Gains in Tally
If you have read till now line by line, you are awesome because you want to learn something in a very detailed way.
We have seen how to see the capital gains in Tally.
Now we will see how to pass capital gains entry in Tally.
From the Stock Summary, when you see the gains in FIFO perpetual as shown in the picture above, press enter to see all the entries.
This will help us to determine whether a gain is a long term gain or a short term gain.
It will look like in the picture below.
Did you note that one of sales of shares is in May, 2017, which means it is long term capital gain because more than 12 months have surpassed since the purchase of the shares.
Both the sales in May and June which are in the year 2016, will be short term capital gains because they are sold within 12 months of the purchase.
Now, will pass one entry for short term capital gains and one entry for long term capital gains.
Note – You can can also pass two entries for short term capital gains since there are two entries. I have done the same in the video.
Firstly, we will pass entry for short term capital gains.
It will be as shown in the picture below.
And, the entry for long term capital gains will be same as short term capital gains as shown in the picture below.
These were the capital gain entries in Tally.
Now if you check the Stock Summary as well as the Balance Sheet both the values of the Reliance share will be the same.
In our case, the value of the share will be NIL because we sold all the shares.
Now you can watch the video tutorial.
It is pretty long because I’ve covered each and every detail, so be sure to watch it full for exact understanding.
Capital Gains in Tally
I am sure by now you must have understood how to pass capital gains entry in Tally.
It was a long process and a long post as well.
I didn’t do it intentionally. It was required to properly explain the concept.
If you have any type of confusion or any kind problem in computing capital gains via Tally, just comment below.
I’ll be glad to help you out! 🙂