Jagoinvestor

May 6, 2009

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 .

capital gain

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 : https://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 don’t 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

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743 Comments
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vijay lalwani
vijay lalwani
3 years ago

Dear sir
my mother purchased a plot and constructed a house in house in 1975
she passed out in 2015 the house was transferred to me in sep 2018 the dlc rate for the same at the time of transfer to me was 70 lakhs i sold the same property in apr 2019 for 100 00 000 and purchased a flat for 49 lakhs how much tax would have i to pay then
purchase price and construction cost by mother is not known
the value of the same in 2001 was 32 lakhs

suresh
suresh
7 years ago

is your capital gain calculator is correct?

RAMAKRISHNAN
RAMAKRISHNAN
7 years ago

I Purchased a flat in chennai in the year nov 2000 for rs.1800000/- in my name. i propose to sell the same and purchase a bigger flat in my wife’s name as I have already been retired from service. Can I avail the benefit of capital gain tax by investing the sale proceeds in my spouse name as she is employed in central govt organisation and eligible for banks’ loan for purchase of a bigger flat?.pl clarify

Vinay
Vinay
7 years ago

Hi Manish,

I am holding some shares from different companies all are in loss. I have not done any purchase or sale from 2011 to Mar 2016. Can you please guide me how to calculate capital gains.

SAJAL
SAJAL
7 years ago

I have bought a plot of land For Rs. 80,000/- in 2000 on cop-operative basis.
Paid construction expenses for Rs. 19,00,000/- during 2014-15 & 2015-16 for build up a flat.
I am going to sell the flat For Rs. 50,00,000/- shortly.
I want to buy a residential flat immediately in a convenient place.

Whether it will be treated as long term capital gain ?
Can I get exemption on long term capital gain tax?
Base year of acquisition will be treated as 2000 and not year of construction for 2016 ?
Kindly reply.
Thanks.

Amit
Amit
7 years ago

Hi Manish,

I do hold few shares from different companies. However I have not done any purchase or sells in year 2015-16. Will there be any short tem capital gain for year 2015-16?
My DMAT profit loss statement shows some short-term gain for the purchases and sell that I had done before 31st Mar 2015. Should I consider this short term gain shown in statement while filling tax?

Thanks!

Dhirendra
Dhirendra
7 years ago

The info on saving Capital Gain Tax has come handy,however please be kind to explain whether the indexation method is applicable to sale & purchase of ancestral property.

I sold a property in 2012 ,this property was inherited from my father.

Index applicable to this for the purpose of purchase is that of 1981-82.

Chandresh
Chandresh
7 years ago

I wish to buy a house ( residential property ) in a joint name with my wife. I am short of funds hence after what I pay from my own funds, bank eligibility can I sell some of my wife jewellery and utilise the money I get towards the payment of my house. I have been married since 25 years now. Would I be liable to pay Long term capital gains on indexation made from selling jewellery which was given to my wife 25 years ago?

SWAROOP
SWAROOP
8 years ago

I have sold a flat in FY 15-16 and purchased new flat in FY 16-17. Old flat has Long Term Capital Gain. Can anyone pls.guide me how to consider this in ITR2 .

For purchasing new flat, I have invested the entire amount recd. through long term capital gain

GLakshminarayana
GLakshminarayana
8 years ago

hi Manish

My father bought a site in bangalore during 1960 and constructed a house on that proerty during 1961. Later on my father expired during 2005, with a will naming me has the successor for the property after demise of my mother. Now i got this property tranfd to my name in 2013. Now i wish to sell the proerty ( 2016) what is my commitment towards Long term Capital gain tax ..

ramesh
ramesh
8 years ago

please send educational topics

ramesh
ramesh
Reply to  ramesh
8 years ago

sir
invested in shares worth 80 000 in 2009

sold them in 2016 and got nearly 190 000

whether long term capital tax to be paid ?

Nagarajan
Nagarajan
8 years ago

I bought a flat in 2003 for 7,50,000 and now I’m selling it for 29,00,000 in 2016. How much tax should I pay?

Indrajit
Indrajit
8 years ago

Hi Manish,
Your article is very informative and helpful in arriving at the indexed cost of a property.
I have one question
In my case we took a bank loan to buy the property – the loan repayment has two components (principal value and interest)
How do you index in such a case?
Shall appreciate your reply to my e-mail ID

SR
SR
8 years ago

Hi Manish,
Can you help me out with ,STCG & how it can be avoided; on a flat purchased at 25lac in Aug 2013 and selling it at 35Lac in 2016.
Thanks In Advance.

SUBIR
SUBIR
8 years ago

Dear Sir, I own 250 shares in one unlisted company in 1987. I bought these shares at face value of Rs. 10/-. Now i have sold them based on a buy-back request and got about Rs. 16,000/-. Please let me know if I have to pay LTCG tax.

kiran
kiran
Reply to  SUBIR
8 years ago

No you need not to pay any LTCG TAX because long term profits in stocks are exempted from tax.

DiptidharM ullick
DiptidharM ullick
8 years ago

i with 2 brothers was owners of a land of 4.5 khatas owned from our grand father.we sold it at 36 laks(12 laks each) in the yr 2013 august .in the sale deed purchaser paid the stamp duty on current valuation rs tree crors .i got my share rs 12 laks (1/3) by cheque & i put it in REC bond.The land is at north kolkata. is IT dept can clim any tax ?

AMIR
AMIR
8 years ago

I AM GOING TO PURCHASE RESALE FLAT WHICH COST ME AT 1650000 BUT I WANT MY AGRREMENT VALUE INCREASD BY 2 LACS THE OWNER OF FLAT PURCHASED SAID FLAT IN 2008 @ 550000 SO HOW MUCH TAX SHOULD HE PAY

Anil
Anil
8 years ago

Sir my father purchased an plot at cost of rupees90,000 in year 1994 later he gifted to mother in year 2010 at market value 27 lakh. plot is lying vaccant still .is their any issue of gift tax or capital gain

pradeep
pradeep
8 years ago

My father bought a land in 1965. he transferred the same to his sons ( we two brothers) in the year 1995. In 2004, our father died. in 2012, we asked a builder to construct 8 flat and give 4 flats. in 2014, i got two flat and my brother got 2 flats. i sold one flat for Rs.56 lacs. in 2014
please tell how to calculate capital gain tax.

ram
ram
8 years ago

Is this calculator formula correct.
Seems till Indexed purchase price its correct. Post that cell b9, 10, and 11 formula seems incorrect. ?