When you sell an asset like a stock or mutual fund after a year and in some cases, like Gold, three years – you need to pay long term capital gains tax. Equity- oriented mutual funds (where more than 65% of the holding is equity) do not have to pay long term cap gains tax currently, and neither when the period of holding is over a year . However in both cases, you will pay a Securities Transaction Tax on the sale.
However as per the newly inserted section 112A via Finance Act 2018, if the amount of long- term Capital gain exceeds Rs 1,00,000 than the amount in excess of Rs 1,00,000 shall be chargeable to tax @ 10% without indexation (plus heath and education cess and surcharge). However the application of sec 112A is subjected to certain conditions, one of it being the transfer should have taken place on or after 1st April ,2018. such capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust om which STT has been paid.
Basically, when property is sold, depending upon the holding period, one will earn either short-term or long-term capital gains.
Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months
i) With effect from Assessment Year 2017-18, period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company,
ii) With effect from A.Y. 2018-19, period of holding to be considered as 24 months in instead of 36 months in case of immovable property being land or building or both.
iii) Period oh holding for debt oriented mutual fund(listed/unlisted) to qualify as long term assets shall be more than 36 months
The tax rate on long-term capital gains is 20.8% of the profit after indexation of cost. The option of paying tax at 10% without indexation is only available in the case of financial assets like mutual funds and the like; it is not available in the case of immovable property – for property, the tax has to be calculated at 20.8% post indexation.
Indexation of cost basically refers to a facility that a taxpayer can use to inflation-adjust the cost. In other words, indexation factors in inflation during the holding period by adjusting the cost of acquisition upwards thereby bringing down the tax liability of the investor.
Putting it differently, the value of the rupee say 10 years ago wasn’t the same as the value currently – essentially on account of inflation. So if you are asked to pay tax on your profits derived out of a simple arithmetic of reducing actual cost from the sale proceeds, it would be unfair. Simply because the sale proceeds are derived out of the current value of the rupee, whereas the cost you paid was based on the value of the rupee as existed 10 years ago in this case.
Therefore, the income tax department releases what is called a cost inflation index (CII) for each financial year. This is done expressly for inflation adjusting the cost. For the purposes of calculating the capital gain, the cost will be multiplied by the CII pertaining to the year of sale and divided by the CII of the year of purchase. This essentially adjusts or inflates the cost to current levels thereby reducing the amount of capital gain than what would have resulted from a simple subtraction.
In terms of an example, say a property was bought in the FY 2001-02 for Rs. 50 lakh. The same is being sold now for Rs. 2 crore. A simple arithmetic subtraction would result in a long-term capita gain of Rs. 1.50 crore. Now, let’s adjust for inflation and see what results. the indexed cost of acquisition shall be (50*280/100=1.4 core). Therefore the capital gain will be (2-1.4) Rs 0.6 crore.
Gains are based on the number of units sold, and each unit’s purchase price. That will not attract any tax until you sell. The investor may buy more before selling, adding to calculation complexity.
Computation of long-term capital Gain
Gains at the time of sale of long term capital assets shall be computed in the following manner: –
|Full value consideration||****|
|(Less) Expenditure incurred wholly and exclusively in connection with such transfer/sale||****|
|(Less) indexed cost of acquisition||****|
|(Less) indexed cost of improvement||****|
|(Less) Exemption (if any) available u/s 54/54B/54D/54Ec/54ED/ 54EE/54f/54G/54GA/54GB||****|
TAX @20% shall be payable on the long term capital gain computed above and advance tax shall also be liable to be paid on such capital gain.
Note: Long-term capital gains must be all added up but in case of other assets (like houses or gold or such) you don’t get to choose between 10% unindexed and 20% indexed. There it’s only indexed (and long term applies only after 24 months). So if you have sold a house and some mutual funds, the calculation will take on the indexation or non-indexation benefit only for the mutual fund bits.
ARTICLE WRITTEN BY: SAGAR SEDAI (CA FINAL) -EMAIL ID: – firstname.lastname@example.org
(Republished With Amendments)