Long term capital gains and new indexation–Here are the things to know about

Long Term Capital Gains (LTCG) refers to any profit or gain arising from the sale of a long-term capital asset.

Long term capital asset:

Long term capital asset means any immovable property that is held for a period of 2 years or more. Such properties include land, building, house property, etc.

However, for a movable property like jewelry, debt-oriented mutual funds, etc. the period will be 3 years or more.

And for some assets, the period is 12 months or more. Such assets are:

• Listed equity/preference shares,
• Debentures, bonds, and other securities listed on a recognized stock exchange in India.
• Units of UTI, zero-coupon bonds or units of equity-oriented mutual fund, whether quoted or not.

Tax on LTCG:

• Those having income under the head “capital gains” are required to file the return form ITR-2 electronically.
• Tax on LTCG is charged at the rate of 20% plus cess @ 4% and surcharge.
• However, the exemption can be claimed under section 54, 54EC, 54F, and 54B of the Income Tax Act.
• Capital gains are always taxed in the year of transfer, even if no consideration is received for such sale.
• LTCG on sale of equity shares or units of equity-oriented funds is taxed at 10 percent without indexation. But if the amount of LTCG on such assets is up to Rs. 1 Lakh/annum, it will remain exempt.

Indexation of costs:

While calculating LTCG, the taxpayer is required to consider the indexed cost of acquisition and improvement. Indexed cost means that the amount will be adjusted for inflation.

The indexed cost of acquisition and improvement is deducted from the full value of consideration to calculate LTCG. Any cost that is necessary for the transfer to take place will also be required to be deducted.

Full value of consideration means the amount for which the asset is sold by the seller.

Cost of acquisition is the cost incurred by the seller or the previous owner to acquire the asset.

Improvement cost  means the amount spent by the seller to make any alteration or addition to the capital asset. But any cost of improvement that was made before April 1, 2001, is not considered.

Indexation is done by applying Cost Inflation Index (CII) to adjust inflation over the years of holding of the asset. The indexation will benefit by increasing the cost of asset thereby lowering the amount of capital gains. CII for the previous year 2019-20 is 289, taking 2001-02 as the base year.

Calculation of indexed cost of acquisition:

Indexed cost of acquisition:

Cost Of Acquisition* CII of the year in which the asset is transferred/ CII of year 2001, whichever is later.

Similarly, the indexed cost of improvement is calculated as:

Cost of improvement* CII of the year in which the asset was transferred or in which improvement took place.

Here is the table showing all the CII numbers for FY 2001-02 to FY 2018-19:

CII Indexation