How to Calculate Capital Gains and What is Indexation ?

In this post we will learn How to calculate Capital Gains or Losses . A lot of people make mistake in this . If you buy a house in 1995 at Rs 10 lacs and sell it at Rs 20 lacs in 2009 . On how much profit will you pay the tax ? If your answer is Rs 10 lacs , you have no idea how to calculate capital gains . Read ahead to understand .

What is Capital Asset ?

Capital Assets are the properties which can be held by a person . Some examples are Real Estate , Shares , Mutual Funds , Gold and Debt Funds . FD’s and other fixed returns Instruments are not part of it .

Taxation

For taxation of Capital Assets , read this : How to use your looses to Reduce Tax

How to Calculate Capital Gains ?

Most of the people think that

Capital Gain = Sell Price – Purchase Price

But , Actually the real formula is

Capital Gain = Sell Price – Indexed Purchase Price

What is Indexation ?

Indexation is a technique to adjust income payments by means of a price Index , in order to maintain the purchasing power of the public after inflation. We must understand that prices in general also rises, so the actual prices should not be used while computing the profits , rather It should be Indexed as per Inflation in the country ,so that people can get the real value from sale of there assets . Indexation is used in Tax treatment for Debt , Gold and other asset classes

What is Cost Inflation Index (CII) ?

Year CPI
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-00 389
2000-01 406
2001-02 426
2002-03 447
2003-04 463
2004-05 480
2005-06 497
2006-07 519
2007-08 551
2008-09 582
2009-10 632
2010-11 711
2011-12 785
2012-13 852

How to Calculate Indexed Purchase Price ?

Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year of purchase)

Once you have Indexed Purchase Price , you can subtract it from Sale Price and get your capital gains .

In some products Long term Capital gains is around 20% with Indexation and 10% without Indexation . In Equities Long term Capital Gains is exempt from Tax .

Let take an Example

 

Purchase Price 1000000
Year of Purchase 1995
Sale Price 2500000
Year of Sale 2008
No of Years 13
Purchase CII 281
Sale CII 582
Indexed Purchase Price 2071174
Capital Gain 428826
Tax with Indexation 85765
Tax without Indexation 150000

 

 

I hope the above example is clear . Below is the calculator I have created for you to calculate Capital Gain tax for your self. Just play with different numbers . Just enter the year of Purchase and Sale and It will figure out the CII (incase it does not, please put CII yourself)

Capital Gains Calculator
I have made a Calculator for you : http://public.sheet.zoho.com/publish/manish.pucsd/temp

Capital Gains Tax with Indexation and Without Indexation

There are some asset classes where you have the choice of using Indexation or not . This is true for debt funds and FMP’s. So the current rate is either 20% with Indexation or 10% without Indexation for Long term Capital Gains .

For Tax without Indexation , you simply find out normal profit (sale price – cost price) and then calculate the tax .

So you can calculate tax using both ways and then choose the one which is lower :) .

How to save your Capital Gains Tax ?

For people who are miser and do not like to pay lot of taxes , govt has provided some relief to them . Govt says that If you dont want to pay tax on your capital gains , you can do following things to save your taxes .

Invest your Capital Gains in Real Estate :If you invest your Capital Gains in Real estate within 2 yrs , you will get the the exemption .

Invest in Capital Gain Bonds :There are some specific bonds issued under sec 54EC , some of them are NHAI or REC bonds . You have to invest in these bonds within 6 months. Generally the lock in period is around 3+ yrs . interest on NHAI or REC bonds is around 5-5.5% .

Tax on Capital Gains can be different for different People

Please note that Capital Gains tax can vary from one person to other person depending on which tax bracket he/she belongs to . It will also depends whether Tax with Indexation or without Indexation works out to be cheaper for him or not .

Note :For calculation purpose the Financial years are business year from April – Mar , Not Jan – Dec . If you buy in June 2009 and sell in Jan 2010 , you are in the same year not 2 different years .

Conclusion

So , In this post we learned how you can calculate capital gains and also take advantage of tax benefits for saving your taxes on capital gains , Your aim should be to understand the process and learn about it, so that you can take informed decisions in your financial life . No one should take advantage of your ignorance and also to take quick decisions and make rough calculations when there is a need. If you know these rules , you can take better decisions

Questions for you

Suppose you are age 30 .
– In June , 2000, You buy 20 lacs Home
– In Aug , 2007, You buy stocks worth 10 Lacs
– In April , 2008 , your sell your house at Rs 30 lacs
– In June 2008 , your stocks have gone down in value are worth Rs 3 lacs now .

What should you do to avoid paying any tax on capital gains made from House ?


In previous post I have discussed “What is NPS , New Pension Scheme” by Govt of India . Read it

 

691 CommentsAdd Comment

  1. Santosh

    Hi Manish,

    I would like to understand indexation in case property is purchased on CLP ( construction linked) basis. What should one take as year of purchase as installments get paid during the construction which usually take 3-5 years to complete.
    Is year of possession should be deemed as year of purchase?

  2. Gita

    Hi,
    I had posted a query on Aug 11th and would be grateful for your comeback as I am unsure if I need to check your site or shall get a mail message on your views and within what time frame I should look fwd to your guidance.

    I am yet to receive a mail to confirm my subscription therefore please excuse my repeat mail as I wish to be sure my query is well received.

    Gita

    August 11, 2015 at 5:28 pm

    Kindly guide as to how one should calculate capital gains in the case the equity share was purchased at face value Rs 10 say in year 2000, but has been converted to Rs 2 face value in 2014 and I plan to sell the same in 2015.
    Grateful for your comeback”‘

    • Hi Gita

      Your cases is a bit complex and I think we are not the right people to comment on it.

      My suggestion would be hire someone who is professional in this area and consult them

      Manish

  3. HARESH

    Dear Manish Chauhan,
    My daughter is NRI/Canadian. She has sold her property in India and money deposited in their Indian Bank A/c. She wants to give Rs. 30 lakhs to me as Gift to enable me to complete/purchase my Bungalow.
    -Can she give money to father and required to prepare Gift Deed, duly notarized in Canada and register same in India?
    -I have to pay any tax for this money/gift.
    -Whether I have to show this gift in my IT Return without paying any tax?
    -My daughter has to show profit amount i.e. (Capital Gain = Sale Price MINUS Indexed Cost of Acquisition, Say Rs. 10 Lakhs). In IT Return under Income from other source 10 L minus 2.5 L (nil tax) and pay 20% on 7.5L i.e. Rs. 1.50L.
    Thanks.

    • She can give you any amount, you dont need to pay any tax on it and dont need to prepare any docs. Just make sure its transferred from her account to yours either throuh cheque or netbanking

  4. Gita

    Kindly guide as to how one should calculate capital gains in the case the equity share was purchased at face value Rs 10 say in year 2000, but has been converted to Rs 2 face value in 2014 and I plan to sell the same in 2015.
    Grateful for your comeback.

  5. Prashad

    Hi, Do I have a choice to calculate capital gain for my Real Estate property with or without indexation that was purchased some 16 years back and plan to sell in coming months after August 2015 ? Your article was very informative but at the end I am a bit confused . For my case, I used your online calculator and the amount was around 4 lakhs without indexation and arount 8.5 Lakhs with indexation. Obviously, I would like to go for Without indexation option if I have a choice, I read some more articles where it is mentioned that “long-term gains on property, gold etc the tax rate is 20% with indexation of cost” after July 2014 which made me to think I have no choice, Please help to clarify.

  6. Padmakar

    I had sold my residential flat at Baroda in JUNE 2015 at Rs.851000/-as per sale deed and Jan try was Rs.8.00.000/.
    This flat was purchased by me in February,2001 at Rs.138000/-.
    Kindly show me/send me calculation of CAPITAL GAINTAX for my filling I.T.Return as on 31/03/2016.

  7. ranit

    Dear sir, I inherited a flat with consideration of love and affection,by gift deed four years back. If I sell the flat now what will be the capital gains tax. Please reply in detail. From Ranjit.

  8. Gaurang

    My grandfather purchased the flat in 1980 at pune area 800 Sq Ft,
    flat was transferred in my name by will in 1998,

    Now in 2015 i am planning to sell the flat at 3000 pq ft

    Kindly suggest how to calculate my tax liability since i dont have purchase cost.

    FURTHER is there any rebate available on flat purchased before 1981? and can that be applicable in my case? If yes then how much and under which section

  9. DrSKSahu

    Hello Manish
    Your guide for tax calculations using indexation was very lucid and useful. Thanks for the post.
    I want to know if purchase of farm land will count towards long term capital gains exemption after sale of house property/ flat? Also when is the CPI for the current financial year notified and where do I find the notification for the current year as I’ve sold a house recently and want to purchase some farm land with the money.
    Regards

  10. Devang

    Hi ,
    I have incured a capital gains of 1Lakh rupees in the previous financial year (Aug2014) , But instead of placing only the capital gain in a capital gain account with the bank. How do i inform the bank that I was suppose to put only the gain part into it instead of the sale amount. Is it possible to withdraw without the fom C?

    • Hi Devang

      I suggest that you now take the RTI route. You can file the RTI and ask your queries to them. THey are bound to reply you on your queries.

      Its a bit long cut, but works well

      Manish

  11. Parshotam

    Hi Manish,
    How do we compute capital gain tax if we buy an under-construction house in say 2010, pay installments through self and loan, take possession in 2014 and sell in 2015 2016 or beyond. Can you explain with example?

    • Your purchase price will be the Price at which you register and the selling price will be what you get on selling . Then follow the calculation method used in this article

      Manish

  12. Manish

    Hi Manish,

    I have applied for ESOP ( not listed in India) . I invested from Dec 2014 in 6 emi’s. Since I left company I can with draw the money. Price of shares have increased which means I will be getting almost 4 times of money invested.

    Please let me know my short term and long term taxes which I am supposed to pay

    • Hi Manish

      Your cases is a bit complex and I think we are not the right people to comment on it.

      My suggestion would be hire someone who is professional in this area and consult them

      Manish

  13. sujita

    sir i have purchased a house in 2012 Dec in 23 and sold in 2014 dec in 28lac so can u please guide me whether the capital gain tax is applicable to me and how can i declare the same.

  14. BSGadodia

    I have flat purchased flat in 1999
    Are reg charges applicable for calculating cost. are addition of facilities over the period and painting etc charges applicable for addition in cost for calculating indexation.
    After sale of this flat, in this year, only the capital gain amount, how can I transfer to son. Because I am a senior citizen of age 69 and do not want to purchase the flat in my name with the capital gain amount. or can I purchase the flat in joint name with my son like bank a/c as E/S. Because he/I want he should have a flat for getting tax benefit on his income. Pl guide.

    • The cost price would be the registered amount in the agreement. You can do one thing , you can sell the house and transfer the money to your son as gift. I suggest take help of a CA on this matter.

      Manish

  15. Munna

    Dear Manish,

    Excellent info given by you.

    I am 25 and don’t have much knowledge on this subject. My question is, how can I know my total income based on my PAN number. I am a software employee. Other than my salary, my incomes are share trading, freelancing to private projects and interest on fixed deposits etc. I can declare my savings as per income tax rules but I want to know the total income tax amount based on all my incomes merged with my PAN number.

    I appreciate your support. Thanks in advance.

    Regards
    Munna

    • Hi Munna

      There is no tool as such where you can punch your PAN and you will get the income tax calculation for you. You either need to do it yourself or involve a CA and provide him all your details !

      Manish

  16. Vinod

    Hi Manish,

    Your detail explanation is good along with the calculator. But the challenge is how to arrive at the purchase price in the case of the ancestral property as one of my cousin sister had released her share using the release deed to her brother.

    Regards,
    Vinod

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