Capital gains made from these investments are subjected to differing levels of taxation in India. Since the tax liability on profits impacts overall returns, it is essential to analyse this aspect before committing funds to any asset class.
Capital gains can be classified as either short-term capital gains (STCG) or long-term capital gains (LTCG). The taxability is the difference between these two types of gains.
If assets are held on for more than three years, the gains accruing from them are treated as long-term capital gains. One exception to this is equity shares. If one holds listed equity shares for more than one year, gains made on these are treated as long-term capital gains.
What is Indexation in LTCG?
Indexation refers to the adjustment in purchase price of an investment for the inflation rate during the period for which it was held. This inflated cost is considered as the purchase price while computing the gains arising from sale of the asset from the taxation perspective.
This benefit is available after holding period of two years in case of property sale, and after three years in case of sale of unlisted shares, gold and debt funds. The Cost of Inflation Index notified by the Income-tax Department every year is used to compute this indexed cost of any asset.
A long-term capital asset gets concessional tax treatment, in more than one way. A holder of a long-term asset, has the benefit of enhancing the cost of the asset for the purpose of computing the taxable capital gains. This is generally known as the benefit of indexation.
If the asset which you are planning to sell, was acquired by you prior to April 1, 1981, you are given an option to use the market value as on April 1, 1981, for the purpose of computing the capital gains. Presently, the law allows you to take the fair market value of the immovable property as on April 1, 1981, instead of the original cost to you or the person who had actually paid for it, in case you have received the immovable property as a gift or inheritance.
The Cost inflation index (CII) value of base year 1981-82 is 100. The CII for the current financial year (FY 2016-17) is 1125.
Budget Proposal
The budget for 2017-18 proposes to shift the base year from 1981 to 2001, effective from April 1, 2017. This is an excellent proposal, as it will effectively make all the appreciation in the value of your immovable property, between the date of your purchase till 2001, tax-free, as the fair market value as on April 1, 2001, can be opted as your cost and the index for 2001 shall be 100 and the same process shall be followed for computation of capital gains.
Gain to the Property Owners
The proposal will significantly reduce the tax liability for the owners of immovable properties, who had bought the same prior to April 1, 2001. This is because the inflation rate in property market between 1981 and 2001 is not captured in the current index.
The exact extent to which the savings might be present is not easy to understand but there are chances that where the asset was bought earlier and is in the nature of property then the change in cost could be significant.
LTCG tax planning
One can avoid paying tax on the LTCG, if the capital gains are reinvested in a residential property within the next 2 years or you get a property constructed within 3 years from the date of property transfer. You can also save on LTCG tax by investing the capital gains in specified bonds notified under section 54EC of Income-tax Act, 1961. However, there is a limit to the amount that you can invest and the maximum amount that can be invested in such bonds is Rs. 50 lakh.
In Union Budget 2017, finance minister Arun Jaitley also announced that additional financial instruments would be introduced in which LTCG can be invested to save taxes.
It was also proposed in Budget 2017 that from the next financial year, gains from selling an immovable property, such as land and building, held for more than 2 years at the time of transfer will be considered as LTCG, and taxed at the rate of 20.6% with indexation
