Blog > Everything You Need to Know about Capital Gains Tax in India

Everything You Need to Know about Capital Gains Tax in India

by Team MMR | 14 November 2013

It’s common knowledge that our income is taxable in India. Therefore this means that any form of income is taxable. Typically a person’s total income may include:

  • Salary
  • Profits / Gain from Business
  • Income from Other Sources
  • Income from House / Property
  • Capital Gains

Here we’re going to elaborate on tax that applies on the income or gains coming from the life of our capital or assets.

 

What is Capital Gains Tax?

As the name suggests, it is the tax levied on any kind of capital gains. Such gains are usually realized when assets or investments are sold or matured to yield a profit. The taxation varies on the following two factors –

  • Types of assets or asset classes
  • Duration of holding the assets

 

Asset Classes

Equity and debt or shares and mutual funds can be thought of as one asset class for capital gains tax computation. They are also relatively more liquid than other kinds of investments.

Similarly bonds or NCDs (Non-Convertible Debentures) can be another asset class given their characteristics of having a defined term, maturity period, position or stake of the bond holders, etc.

Real estate and gold can be seen as another asset class. These asset classes have also been formed on the basis that they differ in their duration of holding or possession with the investor, when it comes to attracting short or long term capital gains tax.

 

What qualifies for Short Term & Long Term Capital Gains Tax?

 

Asset Class

Short Term Capital Gains Tax (STCG)

Long Term Capital Gains Tax (LTCG)

Shares / Mutual Funds

Less than 12 months

More than 12 months

Bonds / NCDs

Less than 12 months

More than 12 months

Real Estate / Gold (physical) 

Less than 36 months

More than 36 months

STCG tax rate as of 2013 is the same as per normal income tax slabs. Basically these gains can be added to your overall income since the taxation treatment is the same. LTCG tax rate is 20% on the indexed costs. Therefore you get indexation benefits on LTCG.

 

What are Indexation Benefits?

India is an inflationary economy. It negatively impacts the real value of money. Indexation basically involves factoring in - the inflation indices of the year in which the assets were procured and the same when the assets mature or are to be sold off. This added factor in the computation of the tax payable, reduces the negative impact of inflation on the investments that qualify for LTCG.

 

Computation of STCG Tax

Since STCG tax is calculated just as normal income, the main step here is to calculate the amount of gain –

STCG = Full Value of Consideration – {Cost of Acquisition + Cost of Improvement + Cost of Transfer}

 LTCG tax on the other hand, rewards the investors for holding the investments for a certain period, with indexation. This requires us to first calculate the indexed costs –

 

Indexed Costs of Acquisition = Cost of Acquisition  x  CII in the Year of Transfer

                                                                              CII in the Year of Acquisition

 

Indexed Costs of Improvement = Cost of Improvement  x  CII in the Year of Transfer

                                                                                      CII in the Year of Improvement

 

wherein CII stands for Cost Inflation Index

 

Therefore,LTCG = Full Value of Consideration received / accruing – {Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer}. Then a flat rate of 20% (as of 2013) is applied on the above result which is your LTCG tax.

About the author: Vikram Ramchand is the founder and CEO of Make my Returns. Connect with him via Google+.

 


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