Long Term Capital Gains Tax

Introduction

In this article I will be writing about the indexation for the Long Term Capital Gains(LTCG). I have published many articles explaining the capital gains and different types of capital gains. It seems to be not enough for our readers, still asking many questions about the capital gains and the main doubts is how to calculate the index value of the sold property. This article explains the problem with a small example on Long Term Capital Gains(LTCG). Also it covers some of the ways to avoid the capital gains tax. I hope this article will be useful for the readers.  If you have any doubts, please post it in the comments section. Get free updates on mail.

Know About Capital Gains

Before getting into the Long Term Capital Gains(LTCG), consider learning about the basics on capital gains. Earlier I have written about basics on capital gains.

Cost Inflation Index(CII)

In this section I will explain how to find the present value of the indexation. In order to find the capital gains tax, you will have to find the actual value of the property at the time of  sales. The following is the formula to find out the indexation:

CII for the year the property sold

Indexed Cost of Aquisition =  ————————————————   x   Cost Price

CII for the year the property bought

How to calculate Capital Gains Tax?

The above section only illustrates the formula for finding out the indexed value of acquiring the property. In this section I will explain how to calculate the capital gains tax with simple example.

Example:-

Question:

Mr. X bought new house in May, 2002 for Rs.1000000. The same house he sold for Rs.1900000 in the year 2007, August.  How much he is liable to pay the capital gains tax and how he can reduce the tax by investing the profit into other avenues?

Answer:

551

Indexed Cost of Aquisition = —– X 1000000 = Rs.1232662

447

Capital Gains = 1900000 – 1232662 = Rs. 667338

Capital Gains Tax = 20% of 667338  is Rs. 133467

I hope the above solution helped you to understand how to find the capital gains tax. There are few scenarios where you can exempt the whole or part of the capital gains tax.

How to reduce the Capital Gains Tax?

If you are investing the capital gains from the sale of property into any of the following categories, it can be exempt from the tax.

• If you had invested the amount equal to the capital gains with in one year prior to the selling property.
• If you have invested the amount equal to the capital gains with in two year after the selling property.
• It is three years if the investment is for constructing new property.
• You can invest up to Rs.50 lacs in National High Way Authority of India(NHAI) or Rural Electrification Corporation(REC) with in 6 months.

In the above scenarios, the total capital gains tax will be exempt. Note that, if the invested amount is less than the total capital gains, then you will have to pay the tax for the remaining amount.

Summary

I hope this article will help the readers to understand how the capital gains tax is calculated. This article explains only about the long term capital gains. If you have any doubts please post it in the comments section.

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1. What is Capital Gains Account Scheme?
2. What is capital gains tax saving bonds?
3. Should I pay taxes for capital gains?
4. Tax Exemption on Capital Gains when selling Agricultural Land
5. What is Cost Inflation Index?