Capital Gains Tax – CGT
Capital gains is the profit that the investor realizes when he sells the capital asset for a price higher than its purchase price. The transfer of capital asset must be made in the previous year. This is taxable under the head ‘Capital Gains’ and there must exist a capital asset, transfer of the capital asset and profit or gains arising from the transfer.
Capital Gains include any property held by the assesse except the following:
- Stock in trade.
- Consumable stores or raw materials held for the purpose of business or profession.
- Personal effects that are movable except jewellery, archaeological collections, drawings, paintings, sculptures or any art work held for personal use.
- Agricultural land. The land must not be located within 8kms from a municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with a minimum population of 10,000.
- 6.5 percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.
- Gold Deposit bonds under Gold Deposit Scheme.
Capital gains tax is a tax that is charged on the profits that he has made by selling his capital asset. For making it easy for taxation, the capital assets are classified to ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.
- Short-Term Capital Asset:If the shares and securities are held by the taxpayer for a period not more than 36 months preceding the date of its transfer will be treated as a short-term capital asset.
- Long- Term Capital Asset:If the taxpayer holds the shares and securities for a period exceeding 36 months before the transfer will be treated as a long-term capital asset.Equity shares which are listed in a recognised stock exchange, units of equity oriented mutual funds, listed debentures and Government securities, units of UTI and Zero Coupon Bonds’ period of holding will be considered for 12 months instead of 36 months.
Transfer is giving up your right on an asset it includes sale, exchange, compulsory acquisition under any law and relinquishment.
Capital Gains Tax in India:
In India, the long-term capital gains on sale of listed securities exceeding Rs.1 lakh are taxed at 10% as per the Union Budget 2018. The short-term gains will be taxed at 15 percent. In case of debt mutual funds, both short and long term capital gains are taxed. The short-term capital gain on debt mutual fund is added to the income and taxed as per the individual’s Income Tax Slab and the long-term capital gains on debt mutual funds are taxed at 20 percent with indexation and 10 percent without indexation. Indexation is adjusting the purchase value for inflation. The indexation increases the purchase cost and lowers the gain.
As per Union Budget 2018, Long-term Capital Gains (LTCG) on the sale of listed securities exceeding more than Rs.1 lakh will be taxed at 10% without the benefit of indexation. Fortunately, existing investors can get relief on the exempt amount of capital gains till 31 January 2018. However, the amount of gains made thereafter (after 31 January 2018) will be taxed.
Capital Gain Index:
It is important to know about the cost inflation index when you are calculating the long-term capital gains. The long-term capital gain is computed by deducting the indexed cost of acquisition and indexed cost of improvement.
The concept of indexation was introduced as the value of a rupee keeps changing due to inflation. If it is fair to pay more for a toothpaste over the years, it is fair to pay capital gain tax with incorporating the effect of inflation on your purchase. Indexation lets you show a higher purchase cost of the capital asset that you bought, this helps lower your overall profit.
The acquisition price is indexed by a factor called the Cost Inflation Index (CII).
CII is the CII for year in which the asset is transferred divided by the year in which the asset was acquired. The CII is then multiplied with the purchase price to arrive at the indexed acquisition cost. The cost inflation index for the year 2016-2017 is 1125.
