In terms of investment, the gain does not accrue until the asset is actually sold/ transferred. Increases in value without transfer do not trigger a tax event.Consider a mutual fund, which is a cheap vehicle for a large pool of investors to put their collected money into various securities such as stocks, bonds or money market components. A tax savvy investor will first determine the fund’s unrealized capital gains over the years, usually given as a percentage of the net value of underlying assets, before investing in it. This is also called the mutual fund’s capital gains exposure. When the fund’s management decides to distribute these capital gains, they also become a tax liability for the investors.
Short Term and Long Term Capital Gains
A capital gain may be short term or long term. In India, for the fiscal year 2017-18, the short term is anything equal to or less than 24 months. Any period of holding of the asset for longer than this makes the gains received on it a long term capital gain. To be taxed in the current financial year, the transfer of capital assets should have been made in the previous financial year.
For individuals or Hindu undivided families, the reduction of time period for a capital gain arising from an estate sale from 36 months to 24 months (2 years) for the ongoing financial year is good news. This is because short term capital gains are taxed at marginal tax rates and usually amount to a small sum but long term capital gains taxes at the rate of 20% of the profit can burn a deep hole in your pocket.
|Tax Classification||Period of holding for FY 2017-18||Rate of Tax|
|Short terms capital gains||Less than 2 years after registry or issue of OC, whichever is later||Marginal tax rate – (variable up to 30%) + 3% cess + up to 15% surcharge|
|Long Term Capital Gains||2 years or more||20% with indexation benefit and 10% without indexation benefit. Exemptions available if proceeds invested in residential house or Section 54EC bonds|
Calculation of Capital Gains Tax on Sale of Property:
- Note the value of the received amount after sale of the property. In this case, the cost of acquisition would be the original purchase price paid at the time of acquisition.
- Subtract all expenses incurred in the process of sale or transfer such as stamp duty, commissions paid to realtor, documentation etc from the value of sale or transfer.
- You may multiply the acquisition cost by a Cost Inflation Index ratio to “inflate” the property value in line with general inflation. The CII is published by the CBDT for every year. As a point of interest, the CII for the assessment year 2017-2018 is 272. The formula is :
Indexed acquisition cost = CII of Year of Sale/ CII of Year of acquisition
- Subtract the Acquisition Cost after Indexing from the Value of Sale.
- Subtract Indexed value of repairs and renovations from the value in the previous Step.
Section 54 allows you to claim exemption from paying income tax on capital gains if the money received is re invested in another residential property within India either 1 year before or 2 years after the date of sale.
You can also claim this exemption if you spend in constructing another residential building within 3 years from the date of sale.
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