Capitals Gain Indexation Query

POSTED BY jigneshdesai05 ON November 23, 2011 2:46 am ONE COMMENT

Question 1) In the practical world ,to what extent does Indexation actually reduce the TAX INCIDENCE on Long Term Capital Gains (especially on Property) ?

For example , say a person purchased a plot in the year 2000 for Rs. 1,00,000 . He sells it for Rs. 2,00,000 in 2005 . His Indexed Cost would be 100000 x 497 / 406 = Rs. 1,22,414 . So , his LTCG would be 2,00,000 – 1,22,414 = Rs. 77,586 . He pays 20 % on this , so his LTCG Tax would be Rs.15,517 . His actual LTCG is Rs. 1,00,000 . Rs. 15,517 is 15.5 % of Rs. 1,00,000 . So , in effect , because of Indexation , his TAX INCIDENCE reduced to 15.5 % instead of 20% (by almost 5 % ) .

So , in real life , in India , after the Cost of an asset is recalculated using the Cost – Inflation Index , is the tax that the assessee has to pay on the Capital Gain considerably reduced & becomes negligible or is it that even after the cost is adjusted for inflation , the assessee ends up paying almost close to 20 % of the ACTUAL PROFITS ?

Question 2 ) In case of Gold , Jewellery , Property , etc , when an Assessee makes a LongTerm Capital Gain , does he have an option to select whether he wants to pay (i) 10 % on the LTCG or (ii) 20 % on the LTCG after the Cost has been recalculated using the Cost Inflation Index ?

One reply on this article “Capitals Gain Indexation Query”

  1. jitendra solanki says:

    Firstly, The tax rate on long-term capital gains is 20.6% of the profit after indexation of cost. The option of paying tax at 10% without indexation is only available in the case of financial assets like mutual funds and the like; it is not available in the case of immovable property – for property, the tax has to be calculated at 20.6% post indexation.

    Yes the indexation benefit reduces the profit which in turn reduces your tax outgo.However, it becoming negligible happens in cases where your property is hardly appreciating.So the tax outgo will reduce by certain amount as you have calculated.

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