Long term capital gains tax in India

Capital gains, as the word suggests, is some kind of monetary gain and most probably from some Capital goods. That is what it would mean, in very simple and layman terms.

However we will clear the cloud from such a vague meaning, and provide you with a complete understanding of what Long Term Capital Gains Tax (LTCG is the short form, as well as the Indian Income Tax Department’s terminology) means, as per the Income Tax Department of India.

In practice Long Term Capital Gains is applied for Sale of two types of Capital Assets. One is House, and the other is shares / mutual funds. Any monetary gain thus accrued as a result of sale of either type of Capital Asset attracts Capital Gains Tax. In this there are two variations. One is Short Term Capital Gains Tax, and the other one is what this article is all about, which is LTCG or Long Term Capital Gains Tax.

If you sell an asset such as bonds, shares, mutual fund units, property etc, you must pay tax on the profit earned from it. This profit is called Capital Gains. The tax paid on this amount of capital gains is called capital Gains tax. Conversely, if you make a loss on sale of assets, you incur a capital loss.

Long Term Capital Gains – If you sell the asset after 36 months from the date of purchase (After 12 months for shares and mutual funds)

How does the Indian Income Tax Laws Treat LTCG

Income Tax laws have a provision of reducing the effective tax burden on long-term capital gains that you earn. This provision allows you to increase the purchase price of the asset that you have sold. This helps to reduce the net taxable profit allowing you to pay lower capital gains tax. The idea behind this is Adjustments against the inflation – since we know inflation reduces asset value over a period of time. This benefit provided by Income Tax laws is called ‘Indexation’.

What is Indexation

Under Indexation you are allowed by Income Tax Laws to inflate the cost of your asset by a government notified inflation factor. This factor is called the ‘Cost Inflation Index’, from which the word ‘Indexation’ has been derived. This inflation index is used to compute the cost price of your Asset adjusted against the cumulative inflation on year-on-year basis. This helps to counter the erosion of value in the price of an asset and brings the value of an asset at par with prevailing market price. The government every year notifies this cost inflation index factor. This index is in the form of a numerical value and is announced every year due to inflation. The base year for Cost Inflation Index has been determined by Indian Income Tax Department as 1981 and had assigned 100 points for this year. We will see in the later part of this article how this numerical value gets factored in the Long Term Capital Gains Tax Calculations.

The cost inflation index (CII) is calculated as shown

CII = Inflation Index numerical value for year in which asset is sold DIVIDED BY Inflation Index numerical value for year in which asset was bought MULTIPLIED by the cost of the asset. This index is then multiplied by the cost of the asset to arrive at inflated cost.

Let us try to understand this with a simple example.

  • An asset was purchased in FY 1996-97 for Rs. 2.50 lacs
  • This asset was sold in FY 2004-05 for Rs. 4.50 lacs
  • Cost Inflation Index in 1996-97 was 305 and in 2004-05 it was 480
  • So, indexed cost of acquisition would be:

Rs. 2,50,000 * (480/305) = Rs. 3,93,443

Long Term Capital Gains would be calculated as => Capital Gains = Selling Price of an asset – Indexed Cost i.e. Rs. 450000 – Rs. 393443 = Rs. 56557. Therefore tax payable will be 20% of Rs. 56557 which comes to Rs. 11311.

Had it not been for indexation The Capital Gains tax would have been = Selling Price of an asset – Cost of acquisition i.e. Rs. 450000 – Rs. 250000 = Capital Gains is Rs. 200,000. Therefore tax payable @ 10% of Rs. 200000 would have come to Rs. 20,000.

So you save Rs. 8,689-00 in taxes by using the benefit of indexation.

For the benefit of our readers we are providing you with a Ready Reckoner Chart of CII Values starting from the base year which is 1981. The same is provided underneath.

COST INFLATION INDEX FROM 1981 TO 2009
Financial Year Cost Inflation Index Financial Year Cost Inflation Index
1981-1982 100 1995-1996 281
1982-1983 109 1996-1997 305
1983-1984 116 1997-1998 331
1984-1985 125 1998-1999 351
1985-1986 133 1999-2000 389
1986-1987 140 2000-2001 406
1987-1988 150 2001-2002 426
1988-1989 161 2002-2003 447
1989-1990 172 2003-2004 463
1990-1991 182 2004-2005 480
1991-1992 199 2005-2006 497
1992-1993 223 2006-2007 519
1993-1994 244 2007-2008 551
1994-1995 259 2008-2009 582
    2009-2010 632

42 comments to Long term capital gains tax

  • prodip

    sir if i sell a land in 10 lakhs instead of market price about 20 lakhs (as there is no approach road so not approved by chennai metropolitan development autority only approved village panchyat) and invest the 10 lakhs in buying a new flat part payment ,shall i have to pay capital gain tax ?

  • Sadiq Das

    I purchased present flat at Rs 50,000 in 1980 and now I want to sell this flat at Rs. 1.20 crore in white and want to purchase another one for same price but seller wants to keep 60-40 for black and white for new flat. Pl tell me what will be my tax liability in this case?

  • Chandrakant

    Sir
    I have same e.g. I have purchased a Flat for Rs. 2,80,000 in 99-00.
    Now will be sold in FY 13-14 for Rs. 21,00,000. (SD paid Rs. 126000 + Borkerage 2% on 21 lac + 8500 Advocate fee extra).
    Sir, what will be my Long Term Capital Gain and where should i invest. Which will be the easier way to invest.
    I am thinking to buy new flat for Rs. 25,00,000 lacs.

    Sir please reply,

    Regards
    CS Choudhari

  • Ram Sarovar

    my wife unfortunately expired and she through her will gave all her movable and unmovable property to me. The immovable property is very old house in very depleted condition,quite unsafe to live in.
    It shall be transferred to me in my name shortly by the appropriate authority.
    Please let me know the long term capital gaINS TAX ETC to be paid by me.

    thanks

  • Anuj

    Need a small help – clarification.

    Please refer to point no.2. Can land be purchased after 2 years and the construction completed before 3 years. Or does one have to buy land within 2 years and the extra 1 year is for construction.

    Section 54: Old Asset: Residential Property, New Asset: Residential Property

    Under Section 54 – Any Long Term Capital Gain, arising to an Individual or HUF, from the Sale of a Residential Property (whether Self-Occupied or on Rent) shall be exempt to the extent such capital gains is invested in the
    1.Purchase of another Residential Property within 1 year before or 2 years after the due date of transfer of the Property sold and/or
    2.Construction of Residential house Property within a period of 3 years from the date of acquisition

    Provided that the new Residential House Property purchased or constructed is not transferred within a period of 3 years from the date of acquisition

  • mukundan

    Three is no provision in the first page (ack) IT submission form to show the dividend along with the other income (Saral) and to add and claim exemption for the dividend amount It has provision in some other page to declare as optional which is not reflecting in the first page to show/declare and to have any evidence as acknowledgement for the declaration(s). There is no income proof for the amount This affects the income proof when one go for any reference or any loan with any bank since they go only by the IT acknowledgement/first page.

    mukundan

  • SS Rammohan

    Dear Sir/ Madam,
    I sold my flat (purchased in 2000)in Jan 2012. I booked a flat in newly coming up complex and made part payment. However the construction of the complex has slowed down drastically and will not be completed till early 2015. Request clarify the following:
    a) Do I have to acquire the new flat by Jan 2014 or Jan 2015?(within 2 or 3 years of sale of the first property?)
    b) Can I switch to a new project? If yes, what is the procedure.
    would be grateful for an early reply.
    Best Regards
    Rammohan

  • Pradeep Singh

    I had purchased a land worth Rs. 1,50,000/- + stamp duty of Rs.10,500/- on 27.03.2009 and now i am going to sell it on 30.10.2013 for Rs. 3,50,000/-, there is no any improvement cost. I just want to ask that is there any tax liability for A.Y. 2014-15, i have not any other income except interest on saving accounts of Rs. 2,000/- (which is tax free u/s 80TTA). I dont want to invest in 54EC or 54.

  • DR A K GUPTA

    Sir,
    I am submitting a sample of calculation regarding LTCG Taxation. Kindly inform me whether it is correct or wrong.
    (A) I purchased a flat on 04.08.2005. Purchasing Value: Rs.5, 00,000/-(Five Lacs) plus Stamp duty: Rs.40,000/-(Forty Thousand)
    Sold on 25.07.2013. Consideration Value: Rs. 19, 80,000/-(Nineteen Lac Eighty Thousand)
    CII in F.Y. 2005-2006 was 497 and CII in F .Y.2013-2014 is 939.
    Hence LTCG : 19, 80,000- [(5,00,000/- x 939/497)-40,000/-] = Rs.10,35,332/-
    (B I paid Rs.11,00,00/-(Eleven Lacs ) on 13.03.2013 for purchasing a new flat
    Possession of new flat will be before 27.07.2015( i.e. within two year of selling old flat)
    As per me tax liability is ZERO since more than Rs.10,35,332/- is paid for new flat within one year before the date of sale of old flat (i.e. 25.07.2013).
    Dr A K Gupta, Commandant(Medical) CRPF Jammu

  • I appreciate the article on Capital Gain arising out of Transfer of Long Term/Short Term Assets. It is quite informative/useful/helpful to ordinary tax payers like us. May I request clarification on the following questions ?
    What are the rules under I.Tax about investment of Long Term Capital Gain arising out of sale of lease hold commercial property ( like in Nehru Place, Delhi ) in Long Term Capital Gain Bonds of NHAI or NABARD OR RURAL ELECTRIFICATION CORPN of India ?
    Is there any bar that LTCG arising out of sale of Commercial Property cannot be invested in these Long Term Capital Gain Bonds ?

  • Reena

    We have an ancestral property with house in Mumbai. Parents passed away long back and now my siblings are planning on giving the same for redevelopment. The house was approx. 80 sq. mtrs. built in the fifties. We are being paid a cash component of approx. 40 lakhs each in installments plus an apartment. What would be the capital gains on the cash component? What benefit would be get from the existing house by way of tax reduction. Please advise

  • santhosh

    I bought a flat for 50 lakhs in bangalore in 2009. In my sale there were totally 3 parties are involved. Builder, First buyer who was in agreement with builder while the property was under construction and me.
    So once the flat was ready for possession we executed a tripartite agreement for bank loan purpose that first buyer had agreed to transfer the ownership to my name and finally builder registered the flat on my name.

    We did the registration as per initial agreement between builder and first buyer for 26 lakhs(guidance value). I paid total of 50 lakhs to the first buyer through bank loan and have full documentation for the same. Also builder said he can register the property only as per first agreement.

    Now when i sell my flat for 60 lakhs what would be the value that is considered by income tax dept as buying cost.I can submit all my proof to justify that i paid 50 lakhs for the property. Is it 50 lakhs or the 26 lakhs.

    Please let me know which will be my buying price for the purpose of capital gain calculation.

  • Bharat Bhandari

    Can LTCG and LTCL of two different classes of assets be clubbed. i.e. can we reduce from LTCG on property + LTCG on Gold LTCLoss on shares/debentures.

  • Harini

    Hi ,
    I need your special expertise . I have booked a apartment with a builder in NOV 12. I have sold my another apartment for 40 L in Oct 12 which was bought in Aug 2004 . With that amount i have invested in booking another apartment ( The full cost being 1.25 Cr ) . The booking amount was 60 L . the Apartment is not yet approved. It is in the final stages of approval . So i will be able to register my new flat only by aug 13 . hopefully by then approval MMDA has to come . My Doubt is should i pay capital gain Tax . IS there any way to escape from Capital gains tax

  • Financial Advisor

    You will have to pay capital gains tax on the balance amount left after investing the money in flat/s. If you invest all the amount there will be no capital gains tax applicable. You will have to do all this in the same financial year.

  • Narain

    Hi, need ur special expertise on whether I can invest the amount of my capital gain in my fathers owned property to avail of the capital gain tax benifit, if so will I have to buy the entire property or I can buy a part of it as the property is a flat in a cooperative sociiety

  • K M Krishna

    I understand that the benefit if 10% taxation without indexation is not available in respect of sale of house plots, houses, agri lands etc. and is eligible for transactions related to shares etc.. only.
    Is it correct.

  • pavittar singh

    I want to sell my indian property.I had purchased a house in canada and loan.can i avail exemption under 54.

  • TKRamaseshan

    for availing capital gain tax rebate,it is said that u should have purchased the property/flat one year before the sale date.Is it the registration date of the property purchased, even if the flat is booked two years before the date of registration and loan availed from the date of booking and 75% of the amount is paid and balance 25% is to be paid at the time of registration.generally the builders takes 2yrs or more for completion.Please clarify.

  • ranganatham

    I have long term capital gain on sale of house property.
    I have long term capital loss on sale of shares thru recognised stock exchange with STT paid in the same year.
    can the LTCG from house property be set off against LTCL from sale of shares in the same financial year.

  • prashant

    At the outset accept my congrats & thanks for a very informative article. Continue ur good work. I hv one querry Pl reply on my email.

    1. I sold off father’s house in March 2012 for Rs. 29,25,000, which i had inherited. The payment was received in instalments in – March , aprl, may, aug 2012.

    2. I have kept the sale amount in my Savings a/c.

    3. I have given Rs.8,75,000 to my 5 sisters (Rs.1,75,000 x 5 sisters)by cheque from the sale proceeds, as a token of love as a share in father’s blessings though father had made me sole heir under a will.

    4. I v planned to invest the remaining amount in Capital gains Bonds of REC/NHAI.
    before Oct.2012

    My questions :-

    1. Is there any penalty for keeping the amount in S/B a/c & not in Spl.Cap gains a/c?

    2. Will my capital gains be reduced propertionately & Will i get exemption of Rs.8,75,000 paid to my sisters or will i have to pay tax on that amount also?

    3. Is the period of six months for investing the amount in Bonds will be calculated from March 2012 i.e.Date of Sale or from the date in Sept 2012 on which i received the full & final payment under the sale deed payment terms agreemnt?

    Because how can i invest the full amount in bonds within 6 months of march 2012 when i have not received the full payment immediaetly but received it in instalments till august 2012.

    4. Being a central govt. employees do i have to inform my employer? if so by what date i v to pay the tax with my employer?

    Regards, Prashant

  • Sudarshan

    I was a small investor in the stock marker for over 30 years. Due to some very tragic circumstances I decided to exit from market and donate the money around 18 lakhs to a charitable organisation that allows 100% income tax exemption. There were, in fact, more that 30 folios. Some of the folios were purchased in lots in different times. My queries are:

    i. As there would be 100% Tax exemption on the donated amount, should I still to pay tax?
    ii. If yes, how to calculate tax from such a huge data accumulated over the period of time.
    iii. Is there any limit to what a person can donate in a financial year for getting Tax exemption?

  • Anandita Gandhi

    Sir, If I sale a land property in 2 Carore Rs which i purchased in 1989 in cost 1.60 lec Rs what will be tax and how can I save ltgc

  • Gajanan Pande

    Hi Munish, great stuff, good job :)

    If I redeem my MFs/Stocks in a financial year & the profit comes to around say 1 lakh, what tax bracket it will fall for LTCG tax ? i.e. how much will be the tax applied on it ?

    Do you have any tax slabs for such gains ?

    Thanks
    Gajanan

  • NIRANJAN

    I am having a shop in pune and i am intending to sell it.I had purchased in 5 years ago,I know I will have to pay long term capital gain tax to save tax what is the right rules and regulations of income tax and can I save the amount in Government Bonds,what are the rate of interest and how many years can I invest the amount

  • ashish j shah

    i have sold agriculture land outside city limits which i got from ansestor (which i did not purchase)how to calculate capital gains tax & or else how or where to invest to save capital gain tax

  • Vinay

    My Question is –
    The cii index is it same for all cities / towns in India?
    what is the cii index for 2012-2013 for Pune?

  • Surendra

    My cousin had purchased a house (skeleton) in 2006 for Rs.11.00 lakh and then spent another Rs.7 lakhs in finishing etc. (total cost to became Rs.18.00 lakh) for that they had taken a loan of Rs.11.00 lakh (incl construction cost). Now they have sold the house for Rs.21.00 lakh and are planning to buy another property for Rs.22 lakh. Out of sale proceeds of Rs.21.00 lakh, Rs.9.00 lakh will be used to repay the earlier loan (So surplus is only Rs.12.00 lakh). For the new house they again want to take a loan of Rs.15.00 lakh. My questions are:
    1. Is there any capital gain tax requirement on this transaction, if yes then how much ?
    2. If the purchase of new house is being funded by a housing loan of Rs.15.00 lakh and Rs.7 lakh from the sale proceeds of previous house then how remaining amount Rs.14 lakhs to be shown and does that amount attract any tax ?
    3. If the new house / flat is purchased in his wife’s name only and the loan is in joint name then the tax benefit on interest and principal available to both OR for that they both need to be Co-owner also in addition to being Co-borrower ?
    4. Any suggestions to make is more tax saving transaction.

  • v.vikram

    I purchased a plot of land for registered value of Rs. 10 Lakhs.and spent another Rs. 32 lakhs for betterment and development (It is in a gated township)all in the year 2007,
    Now I am selling the same for Rs.56 lakhs in 2012 and which consists of Rs. 16 lakhs as registered amount in the sale deed (Within the guidance value)and Rs. 40 Lakhs as money received for betterment and development.
    Can you tell me the treatment of capital value tax for this actual case.
    Vikram

  • Raj

    I am using this quote from your article to understand a few things:

    Quote:

    Let us try to understand this with a simple example.

    An asset was purchased in FY 1996-97 for Rs. 2.50 lacs
    This asset was sold in FY 2004-05 for Rs. 4.50 lacs
    Cost Inflation Index in 1996-97 was 305 and in 2004-05 it was 480
    So, indexed cost of acquisition would be:
    Rs. 2,50,000 * (480/305) = Rs. 3,93,443

    Long Term Capital Gains would be calculated as => Capital Gains = Selling Price of an asset – Indexed Cost i.e. Rs. 450000 – Rs. 393443 = Rs. 56557. Therefore tax payable will be 20% of Rs. 56557 which comes to Rs. 11311.

    Had it not been for indexation The Capital Gains tax would have been = Selling Price of an asset – Cost of acquisition i.e. Rs. 450000 – Rs. 250000 = Capital Gains is Rs. 200,000. Therefore tax payable @ 10% of Rs. 200000 would have come to Rs. 20,000.

    Unquote:

    Questions:

    1. If I apply CII, then my tax will be 20% instead of 10%?
    2. After paying the capital gains tax, the funds I have RS. 4.5 Lacs less tax, is not further taxable if I Keep it in FD?
    3. If I don’t want to pay the capital gain tax, I need to reinvest in assets as per the terms. Is it the full amount or the “capital Gained” amount. In your example, can I reinvest only in new assets for Rs. 4.5 – 2.5 lacs or 4.5 lacs – 393443
    4. Is Balance amount of my original investment is at my disposal – ie. 2.5 lacs or 393443 ( extension of previous Q ) without paying any tax?

    Thanks for your article. Your article was useful.

  • Ina

    so for selling price it is government assessed value or the selling price we received? what happens if selling price we received is less than government assessed value? Thanks

  • rajasivaji

    I have purchased building for own purpose purchase value -2,50,0000/- on 18.08.2010

    Now we have to sell one land to 1,50,0000/- kinely let me know capital gain exemption
    eligible or not

  • savarino dsouza

    is this cii index same for all places.

    what is the cii index for 2010-2011

  • Ramesh Kumar Vinayak

    please let me know whether LTCG is clubbed with salary/pension income and if it is clubbed with salary/pension income how the rates of income tax is calculated. Beside please let me know the time by which cost inflation index will be out for the year 2011-2012 as well as rate of LTCG

  • S.C.Gupta

    What is rate of Short Term Capital Gain for financial year 2010 – 11
    Thanks
    S.C.Gupta

  • Sunil Shah

    How to calculate cost of acquisition of a residential house received by a son as per Registered Will of his father?

  • kadir

    Whether an House heridarily held by an assessee since 1969 sold in the year 2011 attracts capital gain tax. How can we determine cost of acquisuion in the case of succession. Kindly clarify

  • Chiranjiv Singh

    Could you please inform the cost inflation index for 2010-11.

    Thanks.

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