Understand Capital Gains Tax

The Union Budget 2020-21 is round the corner. There are calls for a reduction in the income tax rates and an increase in the Section 80C limits. However, there’s an additional demand. Investors want the Government to scrap LTCG tax on equity funds. A long term capital gains tax was imposed on equity funds for long term capital gains in excess of Rs 1 Lakh in FY 2018-19.  Let’s understand capital gains tax.

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Understand Capital Gains Tax

Any asset owned (It’s immaterial whether it’s connected to the business or profession), is a capital asset. These are stocks, mutual funds, company FDs, bonds, gold and house/apartment/property. Jewellery and art collection are also part of this category.

Gains arising from the sale of a capital asset are called capital gains. Taxable gains in some investments enjoy the indexation benefit. (Indexation is basically the effect of inflation on the purchase price). It recognizes the price you bought the asset for years ago.

See Also: Capital Gains Tax in India: Know Everything About It

With the indexation facility, the cost price of the asset gets pushed up. Gains which are basically (selling price – cost price) are lower than the actual amount, softening the tax blow. The capital losses can be set off against capital gains made on other capital assets. While the short term capital losses can be set-off against long term and short term capital gains; the long term capital losses can be set off only against long term capital gains.

Equity Funds and Stocks:

If you hold equity funds and stocks for less than a year and then sell, gains are called short term capital gains. STCG is taxed at 15% + cess. If equity funds are held for a year or more, gains are classified as LTCG or long term capital gains. The long term capital gains on equity funds are taxed at 10% on capital gains exceeding Rs 1 Lakh.

You have the grandfathering clause, where the highest traded stock price or NAV of the equity mutual fund as on January 31^st 2018 is considered to be cost of acquisition. This is used to compute the LTCG. If your actual cost of purchase is higher than the equity assets fair market value as on 31^st January 2018, this value is taken to compute LTCG.

See Also: Saving Long Term Capital Gain Tax on Debt Funds

Debt Funds:

If debt funds are held for less than 3 years and then sold, the capital gains are called short term capital gains.  STCG is added to taxable income and taxed as per income tax slabs. (Marginal rate of taxation).

If debt funds are held for more than 3 years and then sold, capital gains are called long term capital gains. LTCG is taxed at 20% with indexation benefit.

House Property or Land Plot

For house property or land plot the holding period for the long term capital asset is 2 years. LTCG is taxed at 20% with indexation benefit.

See Also: What is the Difference Between Tax Free Bonds and Tax Saving Bonds?

LTCG Tax Payable on Sale of an Apartment:

The apartment was bought for Rs 50 Lakhs in January 2015. It was sold for Rs 70 Lakhs in September 2018. Let’s calculate the LTCG tax?

FINANCIAL YEAR (FY)	COST INFLATION INDEX
2001-02	100
2002-03	105
2003-04	109
2004-05	113
2005-06	117
2006-07	122
2007-08	129
2008-09	137
2009-10	148
2010-11	167
2011-12	184
2012-13	200
2013-14	220
2014-15	240
2015-16	254
2016-17	264
2016-17	264
2017-18	272
2018-19	280

Year of purchase = 2014-15.

Year of Sale = 2018-19.

Cost of acquisition = Rs 50 Lakhs

Sales proceeds = Rs 70 Lakhs

Indexed cost of acquisition = 50,00,000 * 280/240 = 58,33,333.33.

LTCG = 70,00,000 – 58,33,333 = Rs 11,66,667.

(Selling Price – Indexed cost of acquisition)

LTCG @20% = Rs 2,33,333.

Gold and Gold ETFs

You have short term capital gains tax on capital gains on sale of physical gold within 3 years of purchase. STCG is added to taxable salary and taxed as per income tax slabs. If gold is held for 3 years or more, the long term capital gains are taxed at 20% with the indexation benefit. Gold ETFs are taxed in a similar way to physical gold.

See Also: How To Save Long Term Capital Gains Tax on Sale of House?

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