When you sell an asset like a stock or mutual fund after a year – in some cases, like Gold, three years – you need to pay long term capital gains tax. Equity mutual funds where more than 65% of the holding is equity don’t have long term cap gains tax currently, and neither does stock held for over a year – in both cases, you will pay a Securities Transaction Tax on the sale.
Basically, when property is sold, depending upon the holding period, one will earn either short-term or long-term capital gains. If the property is sold after three years of owning it, the gain will be long-term, else it will be short-term.
The tax rate on long-term capital gains is 20.6% 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 20.6% 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 2000-01 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.
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/54f/54g||****|
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 three years). 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)
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