There is no need to get flustered about capital gains. It is a tax that is part of your yearly returns. Usually, taxpayers employ a Chartered Accountant, CA, to calculate their liability, but there is no need to do so.
It is quite simple to calculate your tax outgo due to capital gains.
What is Capital Gains Tax?
Capital Gains is a tax that is levied on profit made from the transaction of a capital asset. Examples of capital assets include non-agricultural land, gold jewelry, house, apartment, shares, etc.
There are some exceptions to this rule:
- Agricultural land
- Stock in trade
- Various government bonds issued in 1971, 1980, 1991, 1999, 2015
Other assets that are not a part of the capital gains regime are notified by tax authorities from time to time.
Types of Capital Gains
Capital gains may be short- or long-term.
- When an asset is held for less than 36 months, it falls under short-term capital gains.
- When an asset is held for more than 36 months, it is taxed under long-term capital gains.
These are the exceptions to the 36-month rule:
- Shares are taxed under STCG till 12 months and after that under LTCG.
- The same 12-month rule is used for debentures, units of equity-based mutual funds, zero-coupon bonds.
- House property would come under the 24-month rule if the purchase were from FY 2017-18.
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Indexation and Its Uses
Since there is inflation, the value of money declines. The ₹ 2000 in your pocket can buy more today than it will in three years.
Does it not hold to reason that if you are selling a house at a profit, after holding it for a decade, you are allowed to subtract the inflation?
That is why indexation is used. The inflation index is published yearly by the Central Board of Direct Taxes and readily available on the internet.
How does it work? Let us explain the mechanism simply.
You bought an apartment in Delhi in 2010-11 and sold it in the year 2019-20. The cost was ₹ 55 lakhs.
The index for the year 2010-11 was 167 and for 2019-20 was 289.
The indexed purchase value = (289/167) * 5500000 = ₹ 9517970 or about ₹ 95 lakhs.
You sold it for 1.23 crores, and the profit is ₹ 28 lakhs.
You would pay LTCG at prescribed rates on this amount and not ₹ 68 lakhs (your paper profits without indexation).
If the purchase was long ago, the base year is taken as 2001-2, and the index value as 100.
Rates of Capital Gains
|STCG||LTCG||Definition of long term|
|Shares||15%||10%||More than 12 months|
|Equity based mutual funds||15%||10%||More than 12 months|
|Debt based mutual funds||Slab rate||20%||More than 36 months|
|Bonds||Slab rate||10%||More than 12 months|
|Real estate||Slab rate||20%||More than 24 months|
|Gold||Slab rate||20%||More than 36 months|
The rates have remained unchanged in the Union Budget for FY 2021-22 announced by Hon’ble Finance Minister on 1 February 2021.
Slab rate means the prevailing rate of income tax.
Cess, as charged by the government from time to time, is extra.
The implication of Securities Transaction Tax on sale of equity shares is not considered in this analysis.
Are There Any Complexities?
It is quite simple actually to find out capital gains. However, there may arise disputes in the case of inherited property as well as jewelry. That is a matter best explained by those well versed in relevant case laws and jurisprudence.
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