So, you are ready to dispose off your assets. Do you know that the gain you will earn on selling your assets can attract income tax under the head ‘capital gains’? Are you aware that if you sustain a loss on selling your asset, then in some cases you can adjust it in next few years? But what exactly is Capital Gain, how it is calculated and how much tax is required to pay on such gains, is it mandatory to calculate capital gains for all assets? Keep reading ahead and you will definitely get answers to all these questions.
What is Capital Gain?
Capital gain is the profit earned by selling a capital asset. Now, the question ‘what is a capital asset’. Capital Asset refers to any kind of property held by an assessee excluding stock in-trade, items of personal effects (movable property like apparels, furniture, etc.) and rural agricultural land. Despite being a movable asset, jewellery is not exempt from being called as capital asset. A capital asset can be short-term capital asset and long term capital asset.
If you sell a capital asset within 36 months of its transfer on your name, it will be a short term capital asset and any gain or loss on its transfer will be short term capital gain or loss respectively. However, the period of 36 months is reduced to 12 months in case a capital asset is equity or preference shares or any other security listed in recognized stock exchange in India or units of UTI or mutual funds. Before transferring your capital asset, if you keep them on your name for more than the period specified above, it will be referred to as long term capital asset and accordingly the gain or loss on its transfer will be taken as long term capital gain or loss respectively.
How to Calculate Capital Gains?
Short term capital gain= Selling price – purchase price – cost of improvement in asset – expenses of transfer
Long term capital gain = Selling price – indexed cost of acquisition – indexed cost of improvement in asset – expenses of transfer
With this, it is clear that indexation is relevant only in case of transfer of long term capital assets.
What is Indexation?
Indexation is a technique whereby the payments are adjusted in parity with inflation by means of a price index. Suppose 20 years back, a house was purchased for Rs. 50,000 and now it is selling for Rs. 2, 50,000, this calculates the capital gain to be Rs. 2, 00,000. However, if we convert 20 years old amount of Rs. 50,000 to current date, it will be indexed as Rs. 1,82,206, i.e. capital gain will amount to Rs. 67,794 (2,50,000 – 1,82,206). Therefore, indexation is a beneficial proposition in the hands of assessee.
Cost Inflation Index (CII)
| Financial Year | CII | Financial Year | CII | Financial Year | CII | Financial Year | CII |
| 1981-82 | 100 | 1990-91 | 182 | 1999-2000 | 389 | 2008-09 | 582 |
| 1982-83 | 109 | 1991-92 | 199 | 2000-01 | 406 | 2009-10 | 632 |
| 1983-84 | 116 | 1992-93 | 223 | 20001-02 | 426 | 2010-11 | 711 |
| 1984-85 | 125 | 1993-94 | 244 | 2002-03 | 447 | 2011-12 | 785 |
| 1985-86 | 133 | 1994-95 | 259 | 2003-04 | 463 | 2012-13 | 852 |
| 1986-87 | 140 | 1995-96 | 281 | 2004-05 | 480 | 2013-14 | 939 |
| 1987-88 | 150 | 1996-97 | 305 | 2005-06 | 497 | 2014-15 | 1024 |
| 1988-89 | 161 | 1997-98 | 331 | 2006-07 | 519 | ||
| 1989-90 | 172 | 1998-99 | 351 | 2007-08 | 551 |
How to Calculate Indexed Cost of Acquisition
Indexed cost of acquisition = Cost of Acquisition *(CII of the year of transfer/ CII of the year of acquisition)
Let us make it clear with the help of an example:
Building purchased in 1988-89 for Rs. 5, 00,000
Registration charges : Rs. 20,000
Sold in 2014-15 for Rs. 35, 00,000
Cost of acquisition = purchase price + registration charges
= 5,00,000 + 20,000 = 5,20,000
Indexed cost of acquisition = Cost of acquisition* (CII of 2014-15/ CII of 1988-89)
= 5,20,000 * (1024/ 161) = 33,07,329
Capital Gain = 35,00,000 – 33,07,329 = Rs. 1,92,671
Tax will be calculated on the amount of capital gain as per the prevailing rate of taxation and will be entirely dependant on the tax bracket in which you fall. Had there been no indexation, capital gain would have been Rs. 29,80,000.
Can I save my tax on capital gains?
Yes, tax on capital gains can definitely be saved as there are certain exemptions provided by the government. These exemptions will be valid if the entire amount of capital gain is invested in real estate within 2 years from the date of occurrence of such gain. Exemption can also be claimed under section 54EC if the amount of capital gain is invested within 6 months in specified assets (bonds irredeemable after 3 years and issued by NHAI, SIDBI, NABARD, NHB, etc.).
