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 .
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 10% with Indexation or 20% 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 .
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