All about Capital Gain Tax !!

 

 All about Capital Gain Tax !!

Beware of Capital Gains Tax

How many of us are aware of Capital Gain Tax?

How many of us are really paying the capital gain tax for the shares/mutual fund units/land/house, jewellery etc sold and gained a profit out of this deal.  As per the Income Tax Law you are liable to pay tax on such gains even if you have no other income. Most of the people are not bothered to pay this tax, either because of ignorance or deliberately avoid paying tax.

Capital gain, as the word denotes, some kind of financial benefits gained as a result of sale of some capital assets.    Profit or gain arising from the transfer/sale of a capital asset made in a previous year is taxable under the head "Capital Gains". The important ingredients for capital gains are, therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise from such transfer. If you sell an asset such as bonds, shares, mutual fund units, property (house, land, and apartment) etc, you are liable to pay tax on the profit earned out of it. This profit is called Capital Gains. The tax paid on this amount of capital gains is called capital Gains tax. On the contrary, if you make a loss on sale of assets, it is treated as capital loss.

Capital Asset

Capital asset generally means a property – house, an apartment, office space, factory, godown,jewellery  or a plot of land or financial assets like shares, mutual fund units, bonds etc

 For tax computation purpose the capital gain is dividend in two categories.

 1)       Short Term  Capital Gain (STCG)

 If Shares, Bonds or Equity Mutual Funds are held for less than 12 months before selling, the gain arising out of it is classified as Short Term Capital Gain. The only condition here is that the shares / equities should be sold on a recognized stock exchange (for example, BSE or NSE If the sale of shares is off-market (that is, if the sale is not on a stock exchange), the gain would be classified like that for other capital assets.    In case of other capital assets like land, building,jewellery etc. the minimum holding period is 36 months.  If those assets are held for less than 36 months before selling, the gain arising out of this deal also classified as Short Term Capital Gain.

This short term capital gain is clubbed with your income for the year, and is taxed at a rate as per the applicable tax slabs / brackets.

Short Term Capital Gain = Sale Price - Purchase Price  

 

Example:

Full Value of Consideration (Sale Price)	10,00,000.00
Less: Cost of Acquisition (usually  the purchase value of the capital asset)	500,000.00
Less: Cost of Improvement (the cost  incurred for the improvement of the asset, if any)	100,000.00
Less: Transfer Expenses (expenditure incurred wholly and exclusively in connection with transfer. (Includes the brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc.)	25,000.00
Short Term Capital Gain	375,000.00

 

2)       Long Term Capital Gain (LTCG)

 If shares, bonds or mutual fund units held more than 12 months and other capital assets for 36 months before selling, the again arising out of this transaction is classified as Long Term Capital Gains.  In practice Long Term Capital Gains is applied for Sale of two types of Capital Assets. One is properties like house, building, land etc and the other is financial assets like shares / mutual funds units, Zero coupon bond etc. Any monetary benefits thus gained as a result of sale of either type of Capital Asset attract Capital Gains Tax.

Example:

Full Value of Consideration (Sale Price)	10,00,000.00
Less: Indexed Cost of Acquisition (usually  the purchase value of the capital asset)	680,000.00
Less:  Indexed Cost of Improvement (the cost  incurred for the improvement of the asset, if any)	110,000.00
Less: Transfer Expenses (expenditure incurred wholly and exclusively in connection with transfer. (Includes the brokerage or commission paid, cost of stamp fee and registrations fee, traveling expenses etc.)	25,000.00
Lees: Exemption Available	-
Short Term Capital Gain	185,000.00

       

In Short

Capital Asset		Short-term	Long-term
Shares held in a company, listed securities, units of Mutual Fund or zero coupon bonds.		If held for a period not exceeding 12 months from the date of acquisition.	Capital Asset which is not a short term capital asset is long term capital asset.
All other Capital Assets like, immovable property, Jewellery etc		If held for period not exceeding 36 months from the date of acquisition	Capital asset which is not a short –term capital asset is long term Capital Asset.

  Cost Inflation Index

As we are all aware the value of money decrease over a period of time due the effect of inflation. The real value of Rs. 100.00 during 1995 will be different from the value now. The Income Tax laws allows to you to reduce the net taxable gain allowing you to pay lower capital gain tax by way of adjustments against inflation.  This is the general rule that, the inflation reduces the real value of the asset over a period of time. In other words this provision allows to you increase the purchase price of assets that you have sold.  This indexation benefit provided by Income Tax laws is called indexation.

Computation of Indexation Benefits

As per the Indexation procedure, the income tax assessee is allowed by Income Tax Laws to inflate the cost of his/her asset by a RBI/Government notified inflation factor. This inflation factor is called the 'Cost Inflation Index'. This inflation index is used to compute the cost price of the Asset adjusted against the cumulative inflation on year-on-year basis. This helps to counter the erosion of value in the price of an asset and brings the value of an asset at par with prevailing market price.  Our India Government every year notifies this cost inflation index factor. This index is in the form of a numerical value and is announced every year. The base year for Cost Inflation Index has been determined by Indian Income Tax Department as 1981 and had assigned 100 points for this year

The purchase price of the asset that needs to be used for calculating the long term capital gains is termed as Indexed Cost of Acquisition.

a)       Indexed Cost of Acquisition = Actual Purchase Price * (Cost Inflation Index during the year of sale / Cost Inflation Index during the year of purchase)

b)       Long Term Capital Gain = (Sale Price – Indexed Cost of Acquisition)    

The following example will give you a clear idea about, how the long term capital gain tax is worked out using Cost Inflation Index (CII)

     An apartment  was purchased in FY 1993-94 for Rs. 10,00,000.00

• This asset was sold in FY 2009-10 for Rs. 32,00,000.00
• Cost Inflation Index in 1993-94 was 244 and in 2009-10 it was 632
• So, indexed cost of acquisition would be:

Rs. 10,00,000.00* (632/244) = Rs. 25,90,163.00

Long Term Capital Gains would be calculated as follows

 Capital Gains = Selling Price of an asset – Indexed Cost

 i.e. Rs. 32,00,000.00– Rs. 25,90,163.00 = Rs. 6,09,837.00.

Therefore tax payable will be 20% of Rs. 6,09,837.00 which comes to Rs. 1,21,967.00

In case you have not opted for indexation.  The Capital Gains tax would  be as follows

 Selling Price of an asset – Cost of acquisition

 i.e. Rs. 32,00,000.00 – Rs. 10,00,000.00 = Capital Gains is Rs.22,00,000.00

Therefore tax payable @ 10% of Rs. 22,00,000.00  would have come to Rs. 2,20,000.00

So you saved Rs. 98,033.00 in taxes by using the benefit of indexation.

Please click here to see the Ready Reckoner Chart of Cost Inflation Index 1981-1982 to 2011-2012