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How to Calculate Long Term Capital Gain Tax

How to Calculate Long Term Capital Gain Tax. In the previous article, we have given How to Calculate Short-Term Capital Gains Tax. Today we are providing the details of long term capital gains tax. A long-term capital gains is a gain from a qualifying investment owned for longer than 12 months before it was sold. The amount of an asset sale that counts toward a capital gain is the difference between the sale value and the purchase value, or simply, the amount of money the investor gained when he sold the asset. Long-term capital gains are assigned a lower tax rate than short-term capital gains in the United States.

How to Calculate Long Term Capital Gain Tax

Long term Capital gains, if the assets like shares and securities, are held by the assessee for a period exceeding 12 months or 36 months in the case of other assets. Units of UTI and specified mutual funds will now be eligible for treatment as long-term capital assets if they are held for a period exceeding 12 months.

Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following:

  • Expenditure connected exclusively with the transfer;
  • The indexed cost of acquisition of the asset, and
  • The indexed cost of improvement, if any, of that asset. In the case of shares, expenditure in connection with the transfer includes the stock broker’s commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.

The cost of acquisition, in such cases, includes the price paid, cost of share transfer stamps, the cost of postage for sending the shares for transfer to the transfer agents of the company, legal expenses, etc.

‘Indexed cost of acquisition’’ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee.

How to Compute Long term Capital gain ?

Long term Capital gains are computed by deducting from the full value of consideration for the transfer of a capital asset the following: l Expenditure connected exclusively with the transfer;

  • The indexed cost of acquisition of the asset,
  • The indexed cost of improvement, if any, of that asset.

In the case of shares, expenditure in connection with the transfer includes the stock broker’s commission but the salary of an employee is not deducted in computing capital gains though the employee may have helped in the transfer of the shares.

The cost of acquisition, in such cases, includes the price paid, cost of share transfer stamps, the cost of postage for sending the shares for transfer to the transfer agents of the company, legal expenses etc.

‘‘Indexed cost of acquisition’’ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee

Claiming Exemption on Long Term Capital Gains

LTCG is exempt for an individual or HUF on sale of a residential house property, if such gains (not the whole consideration) is utilised to purchase or construct another residential house. It should be noted that the new house should be purchased within one year before or two years after the date of transfer. In case of construction, the new house should be constructed within three years from the date of transfer. Exemption will be limited to the capital gains or the cost of the new house, whichever is lower

LTCG is exempt for an individual or HUF where it is realised on sale of any capital asset, not being a residential house, if the net consideration (not merely the gains) is invested in purchase or construction of a residential house. The timeline for purchase or construction is the same as mentioned above. However, to avail this benefit, the assessee should not own more than one house other than the new asset on the date of transfer. As per the recent clarifications made in Finance Act, 2014, the purchase of house property to claim such exemption has been restricted to one residential house property situated in India. Exemption in this case will be proportionate to the amount invested in relation to the net sale consideration.

Read : How to Calculate Short – Term Capital Gain Tax

The exempt amount is calculated by multiplying the capital gain with the number arrived by dividing the amount invested with the net sale consideration. Although LTCG is required to be invested as per the timelines mentioned in Income Tax law (i.e. two/ three years from the date of transfer), it is possible that such investment may not be made before the due date of filing of return.

Accordingly, the unutilised amount of capital gain or net consideration can be deposited in a separate account maintained with a nationalised bank under the Capital Gain Account Scheme (CGAS). Such investment needs to be made before the due date of filing of return of income in order to claim exemption and should be utilised only for specified purposes within the stipulated time period. In case the amount deposited in CGAS is not utilised within the specified period, it shall be charged as LTCG of the year in which the time limit for making the requisite investment expires.

LTCG can be claimed as exempt in case the gains are invested in bonds of National Highways Authority of India and Rural Electrification Corporation within six months from the date of transfer. However, the exemption is limited to Rs 50 lakh in such a case. It has been recently clarified in the Finance Act 2014 that the limit of Rs 50 lakh is in aggregate and applies to total investment. The exemption up to Rs 50 lakh can be claimed only in one financial year, even if the specified period of six months covers two financial years

It is important to remember that staying well informed of beneficial tax provisions always helps in saving substantial tax liability. All that is required is to make prudent investments at the right time. This will help in enjoying the fruits of one’s labour without taking a cut on the pocket in the form of tax.

Saving tax on long-term capital gains

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The Income Tax Act has laid out exemptions under Section 54 and Section 54F to help taxpayers save tax on capital gains.(1)Exemption under Section 54 is available on long-term Capital Gain on sale of a House Property.(2)Exemption under Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property. To reiterate, both the exemptions are available only on long-term capital gains.

Common requirements between the two Sections:

  • A new residential house property must be purchased or constructed to claim the exemption
  • The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
  • Or the new residential house property must be constructed within 3 years of sale of the property/asset
  • If you are not able to invest the specified amount in the manner stated above before the date of tax filing or 1 year from the date of sale, whichever is earlier, deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
  • Only ONE house property can be purchased or constructed.
  • Starting FY 2014-15 it is mandatory that this new residential property must be situated in India. The exemption shall not be available for properties bought or constructed outside India to claim this exemption.

Differences between these two Sections:

Section 54 Section 54F
To claim full exemption the entire capital gains have to be invested. To claim full exemption the entire sale receipts have to be invested.
In case entire capital gains are not invested – the amount not invested is charged to tax as long-term capital gains. In case entire sale receipts are not invested, the exemption is allowed proportionately.
[Exemption = Cost the new house x Capital Gains/Sale Receipts]
  You should not own more than one residential house at the time of sale of the original asset.
This exemption will be reversed if you sell this new property within 3 years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. This exemption will be reversed if you sell this new property within 3 years of its purchase or construction OR if you purchase another residential house within 2 years of the sale of the original asset or construct a residential house other than the new house within 3 years of sale of the original asset. Capital gains from the sale will be taxed as long-term capital gains.

How To Calculate Long Term Capital Gains Tax

When you sell an asset like a stock or mutual fund after a year – in some cases, like Gold, three years – you need to pay long term capital gains tax. Equity mutual funds where more than 65% of the holding is equity don’t have long term cap gains tax currently, and neither does stock held for over a year – in both cases, you will pay a Securities Transaction Tax on the sale.

There are two ways to calculate Long-Term Capital Gains Tax.

With Indexation

Year CII Inflation
1981-82 100
1982-83 109 9.00%
1983-84 116 6.42%
1984-85 125 7.76%
1985-86 133 6.40%
1986-87 140 5.26%
1987-88 150 7.14%
1988-89 161 7.33%
1989-90 172 6.83%
1990-91 182 5.81%
1991-92 199 9.34%
1992-93 223 12.06%
1993-94 244 9.42%
1994-95 259 6.15%
1995-96 281 8.49%
1996-97 305 8.54%
1997-98 331 8.52%
1998-99 351 6.04%
1999-00 389 10.83%
2000-01 406 4.37%
2001-02 426 4.93%
2002-03 447 4.93%
2003-04 463 3.58%
2004-05 480 3.67%
2005-06 497 3.54%
2006-07 519 4.43%
2007-08 551 6.17%
2008-09 582 5.63%
2009-10 632 8.59%
2010-11 711 12.50%
2011-12 785 10.41%
2012-13 852 8.54%
2013-14 939 10.21%
2014-15 1024 9.05%
2015-16 1081 5.57%
2016-17 1125 4.07%

The government understands that you might buy a product this year, but sell it after a few years. But in the process, inflation has destroyed the value of your money – i.e. what might cost Rs. 100 today might cost Rs. 130 in five years (assuming 5.4% inflation – remember, inflation is compounded). So if you sell the product after five years for Rs. 150, your gain really is Rs. 20.

To calculate this actual gain, the Income Tax department releases a cost-inflation-index (CII) figure every year. Usually, in May, it will release the CII for the last financial year – so the CII for 2010-11 was released in May 2011. And it’s not easy to find, but luckily enough people get to know and Google becomes a good friend.

Effectively, the cost of acquisition becomes substantially lower. The formula is:

Indexed Cost of Acquisition = (Actual cost of purchase) * (CII Of Year of Sale)/(CII of Year of Purchase).

Capital Gain = (Sale Price MINUS Indexed Cost of Acquisition).

Capital Gains Tax = 20% of Capital Gain

The indexation benefit allows you to let inflation take its toll on the purchase price; there is no such allowance for “short term” capital gains, in a mutual fund or stock sold within a year of purchase. In that case, the gain (non-indexed) is simply added to your income and your income is taxed appropriately, and that effectively means short-term capital gains are taxed at the highest slab that applies to you.

The indexation benefit also substantially increases your post-tax return when you use a mutual fund rather than, say, a fixed deposit. The mutual fund is indexed for inflation, but the FD return is not (even the annual interest for a multi-year deposit is added to your gross income and taxed).

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