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Computation of long-term capital Gain

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.

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

Note:

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 ****
Gross LTCG ****
(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: –  casagarsedai@gmail.com

Also Read:

Tax on Long Term Capital Gain Under Income Tax Act, 1961

Capital Gain on Real Estate Transactions

Long Term Capital Gain Tax: Here’s all that you need to know!

24 FAQs on Taxation of Long Term Capital Gain on Shares

(Republished With Amendments)

Categories: Income Tax

View Comments (12)

  • IS THERE POSSIBILITY REINVEST THE LTCG EARNED OUT OF SALE DEAL OF LAND INTO NEW PURCHASE OF APPARTMENT., WITH IN 3 MONTHS OF THE SALE LAND - ENTER INTO AGRREMENT FOR APPRTMENT WHICH WILL READY FOR POCESSION IN THREE YEARS LATTER.

    OTHER POINT WHTHER DAUGHTER/HUSBAND / SON-IN-LAW CAN JOIN AS CO-INVESTER WITH THE MAIN INVESTOR WHO HAS PALN TO BY AN APPARTMENT.

    JUST FOR THE SAKE REGISTRATIONS THE NAMES OF THE WIFE INSERTED INTO OR INCLDED WITH THE 1ST HOLDER WHILE PURCHASING THE FIRST APPARTMENT JUST AS JOINT SECOND HOLDER BUT THEY HAD NOT PUT ANY MONEY ON IT, ARE THEY BE CONSIDERED TO BE PERSON HAVING ALREADY HOUSE MORE THAN ONE ARE SO., FOR LTCG CONSIDERTIONS UNDER RULE 54F...

    LAND SALE DEED FOR RS. 63 LACS, WHERE AS APPARTMENT COST COMES 108 LACS.
    AMT IN EXCESS OF 63 LACS IS OUT SAVINGS, EANRED INCOME AND THRU ANY LAONS.

    IS THERE ANY TAX LIABILITY ON THIS IF SO TO WHAT EXTENT, HOW TO SAVE THIS TAX LEGALLY

  • I am 76 years old, I had purchased my flat in 1994 for 7 lacs in Mumbai now I want to sell the flat and shift to settle in other city in India. Present value of the flat is 1Cr. So the total capital gain will be about 93 lacs, taking index consideration (factor 9) the net capital gain will be 37 lacs if I invest the net gain(37Lacs) in capital gain rural bonds for 3 years (lock in period ) then I will be free to invest that amount to invest in other mutual funds, shares or deposits to earn money I do not wish to purchase flat or property and prefer to take flat on rent. Will I get tax deductions for rent of the flat I pay. What are tax implications

  • I am 76 years old, I had purchased my flat in 1994 for 7 lacs now I want to sell the flat and shift to settle in other city in India. Present value of the flat is 1Cr. So the total capital gain will be about 93 lacs, taking index consideration (factor 9) the net capital gain will be 37 lacs if I invest the net gain(37Lacs) in capital gain rural bonds for 3 years (lock in period ) then I will be free to invest that amount to invest in other mutual funds, shares or deposits to earn money I do not wish to purchase flat or property and prefer to take flat on rent. Will I get tax deductions for rent of the flat I pay. What are tax implications

  • Sir,
    I purchased house in oct 2012 for Rs 2100000 (As per agreement).
    Took bank loan for Rs 1600000
    sale deed value is Rs 840500. (in sale deed it is mentioned semi furnished house).
    what is my purchase value?
    I sold house in sep 2018 for Rs 3800000.
    Registration charge for purchage Rs 84000
    brokerage for selling Rs 70000 (given to agent through cheque no receipt)
    how much i have to Pay as capital gain tax.

  • Hi,
    Need an advise to calculate LTCG considering the below points.
    1. The property which was taken as "Paghadi System" in late 70s were 2 small industrial gala in Marol, Andheri (E), Mumbai.
    2. Both the said gala was made as one to carry out machenical work/business
    3. Later on 17/06/1997 an agreement of sale for Rs. 22,500/- made on stamp paper with notary
    4. MMRC took over the said place for metro project and gave 2 flats in Kanjurmarg in 2017 as replacement/ rehabilitation
    5. Now out of 2 flats would like to sell 1 flat at Rs. 25 lacs
    6. In 2001 the market value of the said place (2 combined gala) was around 22-25 lacs.

    Request you to please let me know how much LTCG needs to pay

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