How to Calculate Capital Gains and What is Indexation?

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In this post we will learn How to
calculate Capital Gains or Losses . A lot of people make mistake in this .
If you buy a house in 1995 at Rs 10 lacs and sell it at Rs 20 lacs in 2009 . On
how much profit will you pay the tax ? If your answer is Rs 10 lacs , you have
no idea how to calculate capital gains . Read ahead to understand .
What is Capital Asset ?
Capital Assets are the properties which
can be held by a person . Some examples are Real Estate, Shares Mutual
Funds, Gold and Debt Funds. FD’s and other fixed
returns Instruments are not part of it.


How to Calculate Capital Gains?
Most of the people think that
Capital Gain = Sell Price – Purchase Price 
But , Actually the real formula is
Capital Gain = Sell Price – Indexed
Purchase Price
What is Indexation ?
Indexation is a technique to adjust income payments by
means of a price Index , in order to maintain the purchasing power of the
public after inflation. We must understand that prices in general also rises,
so the actual prices should not be used while computing the profits ,
rather It should be Indexed as per Inflation in the country ,so that people can
get the real value from sale of there assets . Indexation is used in Tax treatment
for Debt , Gold and other asset classes
What is Cost Inflation Index (CII)?
Year
CPI
1981-82
100
1982-83
109
1983-84
116
1984-85
125
1985-86
133
1986-87
140
1987-88
150
1988-89
161
1989-90
172
1990-91
182
1991-92
199
1992-93
223
1993-94
244
1994-95
259
1995-96
281
1996-97
305
1997-98
331
1998-99
351
1999-00
389
2000-01
406
2001-02
426
2002-03
447
2003-04
463
2004-05
480
2005-06
497
2006-07
519
2007-08
551
2008-09
582
2009-10
632
2010-11
711
2011-12
785
2012-13
852
2013-14
939
2014-15
1024
How to Calculate Indexed Purchase Price
?
Indexed Purchase Price = Purchase Price *
(CPI for current year / CPI for year of purchase)
Once you have Indexed Purchase Price ,
you can subtract it from Sale Price and get your capital gains .
In some products Long term Capital
gains is around 20% with Indexation and 10% without Indexation . In Equities
Long term Capital Gains is exempt from Tax .
Let take an Example
Purchase
Price
1000000
Year
of Purchase
1995
Sale
Price
2500000
Year
of Sale
2008
No
of Years
13
Purchase CII
281
Sale CII
582
Indexed
Purchase Price
2071174
Capital
Gain
428826
Tax
with Indexation
85765
Tax
without Indexation
150000
  
I hope the above example is clear.
Below is the calculator I have created for you to calculate Capital Gain tax
for yourself. Just play with different numbers. Just enter the year of Purchase
and Sale and It will figure out the CII (incase it does not,
please put CII yourself)

Capital Gains Calculator
Capital Gains Tax with Indexation and
Without Indexation
There are some asset classes where you
have the choice of using Indexation or not. This is true for debt funds and FMP’s.
So the current rate is either 20% with Indexation or 10% without Indexation for
Long term Capital Gains.
For Tax without Indexation, you simply
find out normal profit (sale price – cost price) and then calculate the tax .
So you can calculate tax using both
ways and then choose the one which is lower .
How to save your Capital Gains Tax?
For people who are miser and do not
like to pay lot of taxes, govt has provided some relief to them. Govt. says
that If you don’t want to pay tax on your capital gains, you can do
following things to save your taxes.
Invest
your Capital Gains in Real Estate
: If you invest your Capital Gains in Real estate
within 2 yrs , you will get the exemption.
Invest
in Capital Gain Bonds
: There are some specific bonds issued under sec
54EC , some of them are NHAI or REC bonds . You have to invest in
these bonds within 6 months. Generally the lock in period is around 3+ yrs. Interest
on NHAI or REC bonds is around 5-5.5% .
Tax on Capital Gains can be different
for different People
Please note that Capital Gains tax can
vary from one person to other person depending on which tax bracket he/she
belongs to . It will also depends whether Tax with Indexation or without
Indexation works out to be cheaper for him or not.

Note
:For calculation purpose the Financial years are business year from
April – Mar , Not Jan – Dec . If you buy in June 2009 and sell in Jan 2010 ,
you are in the same year not 2 different years

Conclusion
So,
In this post we learned how you can calculate capital gains and also take
advantage of tax benefits for saving your taxes on capital gains , Your aim
should be to understand the process and learn about it, so that you can take
informed decisions in your financial life . No one should take advantage
of your ignorance and also to take quick decisions and make rough calculations
when there is a need. If you know these rules, you can take better decisions

RECOMMENDED READ  CBEC clarifies - Dealer registration not mandatory for Sale in Transit

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