We as a whole love purchasing resource. These incorporate gold, property, stocks, debentures and Mutual Funds. On the off chance that you offer these at a cost that is higher than the cost at which you got them, you acquire a pickup. This is a capital pick up. In straightforward words, the pickup or benefit that you make when you offer resources is named as a capital pick up. Since these are not repeating occasions, (for example, your compensation), the tax assessment for these is extraordinary. Here, we endeavor to enable you to see how capital additions are ascertained and how tax assessment functions.
What is a capital gain?
As specified before, a capital picks up is a distinction between what you paid while acquiring the benefit and what you got after offering the advantage. Any benefit or pick up that leaves deal or exchange of a capital resource will be capital pick up. Capital resources incorporate property, gold, shares, Mutual Funds, among others. Here, we will manage capital increases identified with the purchasing and offering of property.
Capital Gains can be of two types. One is Short Term Capital Gain and the other is Long Term Capital Gain. The amount of time you held the asset will determine whether the capital gain you incurred, is a short-term one or a long-term one.
How to calculate Short Term Capital Gains (STCG)
In case of a property, if you sell the property within 3 years of purchasing it, it will be subject to STCG. Here’s the formula for your reference.
Short-term capital gain (STCG) = Sale price of the property – (cost of purchase of property + cost of improvement of property + any other expenditure incurred on sale or transfer)
How to calculate Long Term Capital Gains (LTCG)
If you sell the property after holding it for more than 3 years, then it becomes a long-term asset and LTCG will apply.
Gross Long-Term Capital Gain (LTCG) = Sale price of the property – (indexed cost of purchase of property + indexed cost of improvement of property + any other expenditure incurred on sale or transfer)
Net Gains = Gross LTCG – Exemption (if availed) u/s 54 or 54EC or 54F
Concept of indexation for long-term capital gains
You should comprehend that while computing LTCG you should consider the indexed cost of securing and not the real cost of obtaining. This is on the grounds that the estimation of cash changes after some time. The value you paid for the property years prior might really be worth significantly more as swelling blows up costs after some time. Try not to get it? Give us a chance to clarify. Swelling in the nation lessens the obtaining influence of your cash year-on-year. For instance, you could purchase a motion picture ticket with Rs. 50 10 years back. Today, you won’t get a softie cone at a multiplex at that cost. That is the reason you have to discover what value you would have really paid for it in the event that you had bought it today.
Presently, the inquiry is the manner by which to discover the recorded cost of your property. The appropriate response: you have to utilize the Cost Inflation Index (CII. This file will give you a thought of how costs have turned out to be expanded after some time. The focal administration of India informs the estimation of the file each year. The base year for this record is 1981-82. Along these lines, the file began at 100 by then.
Here are the index figures for the last 10 years:
| Financial Year | Cost of Inflation Index (CII) |
| 2016 – 17 | 1125 |
| 2015 – 16 | 1081 |
| 2014 – 15 | 1024 |
| 2013 – 14 | 939 |
| 2012 – 13 | 852 |
| 2011 – 12 | 785 |
| 2010 – 11 | 711 |
| 2009 – 10 | 632 |
| 2008 – 09 | 582 |
| 2007 – 08 | 551 |
How does indexation actually work?
Here is the formula for calculating the indexed cost of acquiring your property.
Indexed Cost Price= Purchase price of property * (CII for current year / CII for year of purchase)
Once, you get the index cost price, you need to deduct this from the actual sale price to get the actual LTCG.
Here’s an example. Suppose, you purchased a property in 2007 for Rs.40,00,000 which you sold in 2011 for Rs.80,00,000. What will be the actual profits you made on this sale? Find out…
| Cost of property purchase – 2007 | 40,00,000 |
| Sale price of property – 2011 | 80,00,000 |
| CII – 2007 | 551 |
| CII – 2011 | 785 |
| Indexed Cost Price | 40,00,000 * (785/551) = Rs.56,98,729 |
| Long-Term Capital gain | 80,00,000 – 56,98,729 = Rs.23,01,270 |
So, your actual profit after selling the property is not Rs. 40,00,000. It is only Rs. 23,01,270. This is the amount you need to consider to calculate your taxes.
Long term & short term capital gains tax
As per the tax laws in India, you are liable to pay tax when you sell an asset for a profit and this includes property. The tax rate will depend on whether it was LTCG or STCG.
Tax on short-term capital gains
When you incur a short-term capital gain, it will be taxed just like your regular income. This means that the gains will be added to your total income for the year and taxed as per the tax slab that applies to you. For example, suppose your total taxable income for the year exceeds Rs. 10,00,000 (after including the gains you have made), you will have to pay tax at the rate of 30%. Here is the tax slab for Financial Year 2016-17.
| Income Slab | Tax Rate |
| Income up to Rs 2,50,000 | No Tax |
| Income from Rs 2,50,000 – Rs 5,00,000 | 10% |
| Income from Rs 5,00,000 – 10,00,000 | 20% |
| Income more than Rs 10,00,000 | 30% |
Tax on long-term capital gains
Earlier, you could calculate capital gains tax without indexation. However, in the Union Budget FY 2014-15, this taxation was removed. Now, you will need to pay LTCG at the rate of 20% with indexation. Taking the above example used to calculate LTCG, let us now find out what the total tax payable will be.
| Cost of property purchase – 2007 | 40,00,000 |
| Sale price of property – 2011 | 80,00,000 |
| CII – 2007 | 551 |
| CII – 2011 | 785 |
| Indexed Cost Price | 40,00,000 * (785/551) = Rs.56,98,729 |
| LTCG | 80,00,000 – 56,98,729 = Rs.23,01,270 |
| Capital gains tax @ 20% | 23,01,270 * 20% = 4,60,254 |
| Total capital gains tax payable | Rs. 4,60,254 |
As you can see, tax will be on the LTCG that you calculated after indexation i.e. on Rs.23,01,270 and not on the Rs. 40,00,000 profits made.
Can I get an exemption on capital gains?
While you can’t get any derivations or exceptions for here and now capital additions, you can diminish or even dispense with your long haul capital increases assess. You can do this by putting resources into capital additions bonds or on another property. In the event that you need to know more, read this – How to Save Tax on Long-Term Capital Gains. We are certain you won’t overlook capital additions when you offer your property. Influence utilization of the exemptions too when you to make those long-haul capital increases.
