How to calculate taxes from capital gains and combine them with your other income
This article talks about understanding capital gains tax calculations and computing offsets vs other income.
This article talks about understanding capital gains tax calculations and computing offsets vs other income.
Originally published: 28-Jan-2022
Updated: 02-Feb-2022 - updated post the Union budget in Feb-2022
Updated: 29-Jun-2022 - declaration of CII for FY 2022-23
Updated: 02-Feb-2023 - updated post the Union budget in Feb-2023
Updated: 23-Jul-2024 - updated post the Union budget in Jul-2024 for changes in capital gains taxation
Disclaimer: Taxation is a dynamic concept and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.
This article is a part of our detailed article series on the concept of mutual fund taxation in India. Ensure you have read the other parts here:
This article shows how to calculate the tax on selling inherited shares and equity mutual funds using the grandfathering concept.
This article is expected to give investors in India a complete guide on the topic of calculation of taxes on mutual funds.
This articles discusses some benefits and drawbacks of storing your mutual funds in demat mode with one killer feature that makes transmission possible.
This article shows the way forward for investors in debt, gold, hybrid and international funds which have lost indexation benefits on units purchased after 1st April 2023.
This article shows you how the concept of indexation lowers the capital gains tax you pay when you sell debt mutual funds.
This article settles the question of which type of capital gain calculation is better - debt-type funds taxed at 20% with indexation vs equity-type at 10%.
This article explains the concept of equity LTCG grandfathering in detail with multiple case studies and examples.
This post discusses the concept of tax calculations and tax harvesting in a simple manner.
Capital gains come from selling a capital asset like shares, mutual funds or real estate. Tax on capital gains depends on the holding period (short or long, leading to STCG and LTCG). The tax rate is considered ‘tax on special rates’, which is separate from slab-based tax on income.
Capital gains are taxed as
Cess at the applicable rate (currently 4%) should be added to the tax.
Related:
This article explains how grandfathering reduces taxes on selling equity.
This article assumes that the investor understands the basics of capital gains taxes for selling shares and mutual funds as per this article: How is tax calculated on selling shares/MFs and how do to do tax harvesting?. For real estate, the holding period is short-term for less than two years, and otherwise, it is long-term.
Capital assets for the purpose of this article are shares, mutual funds, bonds(SGB, corporate, State government and RBI bonds), and real estate. However, suppose the asset is sold as a part of a business function, for example, a real-estate investor who buys and sells property via their company. In that case, it is considered stock-in-trade and not a capital asset.
Capital gains must be considered using data from the point of purchase or construction (like that of a house) by the original owner. This means that even if the property is transferred (by inheritance) or gifted, the original owner’s costs will be used to calculate capital gains.
The tax on long-term capital gains is lowered by the concept of indexation. Indexation allows you to benefit from depreciation in the value of the asset and inflation by adjusting the purchase price upwards by a factor, published yearly by the Income Tax department, called Cost Inflation Index (CII). In general, assets with indexation benefit on the purchase price, irrespective of appreciation, will lead to lower taxes the longer they are held. Of course, you should not keep capital blocked solely to have the benefit of indexation but a bit of planning is important.
The purchase date of the property for capital gains calculation purpose is the date of the allotment letter. There could be multiple options for choosing the start date like allotment letter date, registration date or possession date. However, the correct option is the allotment letter date.
Capital gains are calculated in the same way on selling land like property.
Related:
Complete Tax Guide for Resident Indians Selling Land in India
Serial # | Financial Year | CII | %ch | Worth of ₹1000 |
---|---|---|---|---|
1 | 2001-02 | 100 | 0.00% | 1000 |
2 | 2002-03 | 105 | 5.00% | 952 |
3 | 2003-04 | 109 | 3.81% | 917 |
4 | 2004-05 | 113 | 3.67% | 885 |
5 | 2005-06 | 117 | 3.54% | 855 |
6 | 2006-07 | 122 | 4.27% | 820 |
7 | 2007-08 | 129 | 5.74% | 775 |
8 | 2008-09 | 137 | 6.20% | 730 |
9 | 2009-10 | 148 | 8.03% | 676 |
10 | 2010-11 | 167 | 12.84% | 599 |
11 | 2011-12 | 184 | 10.18% | 543 |
12 | 2012-13 | 200 | 8.70% | 500 |
13 | 2013-14 | 220 | 10.00% | 455 |
14 | 2014-15 | 240 | 9.09% | 417 |
15 | 2015-16 | 254 | 5.83% | 394 |
16 | 2016-17 | 264 | 3.94% | 379 |
17 | 2017-18 | 272 | 3.03% | 368 |
18 | 2018-19 | 280 | 2.94% | 357 |
19 | 2019-20 | 289 | 3.21% | 346 |
20 | 2020-21 | 301 | 4.15% | 332 |
21 | 2021-22 | 317 | 5.32% | 315 |
22 | 2022-23 | 331 | 4.42% | 302 |
23 | 2023-24 | 348 | 5.14% | 287 |
24 | 2024-25 | 363 | 4.31% | 275 |
As the above table shows, it is easy to calculate the indexed purchase price. In the table above, an asset purchased in FY 2008-09 (CII = 137) and being sold in FY 2017-18 (CII = 272), will have an indexed purchase price of ₹198.54.
Always refer to the latest CII table from here for the calculation of LTCG.
We take the example of a debt mutual fund purchased in 2015 and sold in 2020
Here we see that the LTCG is lower than the simple profit of ₹5,000 due to the benefit of indexation. In the case of real estate, under Section 50C, the sale value is the maximum of the actual sale price and fair market value of the property determined using circle rates or similar means. Also, the buyer of the property has to deduct 1% of the sale value as TDS and deposit that to the income tax authorities in case the sale proceeds exceed ₹50 lakhs. The seller has an option of claiming this amount while filing tax return.
If you are interested in understanding how the 20% indexation rule fares vs. the 10% taxation rule for equities, read this: Which mutual fund has lower tax - international funds at 20 percent vs domestic at 10 percent?.
We take the example of an apartment purchased in 2010 and sold in 2018
The LTCG can be adjusted downwards by any additions and alteration expenses which is called the “Cost of improvement”
The CII starts at 100 for the FY 2001-02. So we need to know the house price in 2001 by using the services of a government-approved assessor. Once that is done, we can proceed in the same way as the previous case with one change: Cost of improvement expenses that have taken place before 2001 will not be considered.
We take the example of a house constructed in 1995 and sold in 2018
Tax on this LTCG is to be paid by the seller. Zero tax will be paid if ₹7.6 lakhs is invested in Sec54EC eligible bonds for 5 years (see below)
In a surprise move, Union Budget 2024 removed the concept of indexation and dropped the capital gains tax rate from 20% for 12.5% for all property sales on or after 23-Jul-2024.
Read more here: Budget 2024: A Surprise in Real Estate Sales due to Indexation Benefit Removal: Is it good or bad?
Section 54 of the income tax allows tax to be saved if:
Offsetting allows you to reduce the net tax payable as per these rules
This concept of offsets allows you to reduce taxes in future years. For example, you have ₹5 lakhs loss from selling a house in 2020. You can keep using that loss against profits in the following years as long as:
Imagine the situation of an investor with only capital gains from stocks/MF as taxable income. Salary, interest income and other income are taxed at the slab rate, and capital gains are taxed at special rates as discussed above. However, the basic ₹2.5 lakhs exemption limit (₹3 lakhs for senior citizens) applies here as well.
You do not pay any tax if total income plus taxable capital gains (after all offsets within capital gains and losses) does not exceed ₹2.5 lakhs. Taxpayers should also check if they are eligible for a rebate under Section 87A to reduce their taxes by a further ₹12,500 if their total income is under ₹500,000.
This same rule is useful for investing in the name of children for their goals: Should you invest in the name of your children?
In the ₹7.6 lakhs LTCG example, if the assessor is a senior citizen (60+ age) with ₹1 lakh income from interest and no other income, then the tax will be like this:
NRIs cannot offset capital gains against the basic exemption limit.
Capital gains is better than income due to favourable taxation laws. Income like interest, rent or dividends are taxed at slab unlike capital gains from mutual funds and real estate. We explain the concept in detail here: Understanding tax deferment: how this concept improves your investment returns?.
A caveat on using basic exemption limit to reduce taxes:
Investments made in the name of family members in lower tax brackets fall under income clubbing rules though gifts are tax-free. For example, if you give ₹5 lakhs to your parent as a gift and that amount is invested. The parent has no other income. After five years, the asset is sold, and LTCG is ₹2 lakhs. Here, the proper practice from a taxation perspective is to consider this income be clubbed with yours and not eligible for exemption in the parent’s name.
More situations and references are available here from incometaxindia.gov.in website:
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This post titled How to calculate taxes from capital gains and combine them with your other income first appeared on 28 Jan 2022 at https://arthgyaan.com