Capital Gain Index

Capital Gain Index

With rising product costs, money's purchasing power—the number of products one unit of currency can buy—decreases with time. If two units of a good could be purchased for Rs 300 today, inflation may make only one unit possible for Rs 300 tomorrow. The Cost Inflation Index (CII) calculates the annual inflation-related rise in the cost of goods and assets. To comprehend the capital gain index, one must first understand what capital gain is and its key related ideas.

Gains produced through the sale of capital assets are referred to as capital gains. Real estate or securities investments may be used to generate the proceeds from such transactions. The gains from capital asset sales can be long-term or short-term, depending on how long the asset would be held.

Long-term capital assets include securities such as equity bonds, zero-coupon bonds, preference shares, UTI units, and stocks that people retain for longer than a year. Apart from them, any other assets kept for more than 36 months are considered long-term assets.

These long-term proceeds would be considered long-term capital gains and be subject to a tax called a capital gain tax. People need to follow a systematic technique for capital gain index calculation when it comes to calculating the number of capital gains that will be realized from a future sale.

Indexation- A Brief

Indexation is a methodical procedure that helps people to safeguard their earnings from tax erosion. Through the procedure, investors can use a price index to adjust investment costs for inflation.

When indexing, the occurrence of inflation in the stock market is considered. It enables people to raise the pricing of their assets to recognize the effects of inflation over time.

Investors can learn to minimize their tax obligations through indexation and learn to account for the inflation rate. Investors will benefit directly by having their capital gains protected from eroding. The Cost of Inflation Gauge is crucial in helping to index the acquisition cost for mutual funds.

Capital Gains Tax

The nature of capital gain determines how tax is calculated.

  • Tax on short-term capital gains is calculated differently than on long-term capital gains. Gains from short-term investments are added to overall income, and the income tax is then computed according to your tax band.
  • Long-term capital gains tax calculation is a little more challenging. Inflation is considered when calculating the tax on long-term capital gains, as long-term capital assets are kept for extended periods.

Capital Gains Calculator

One of the internet programs made specifically for this purpose can be used to calculate capital gains tax. The required data should be entered into a calculator when estimating capital gains tax:

  • Sale price
  • Purchase price
  • Information about the purchase, including the day, month, and year of the purchase
  • Information about the sale, including the day, month, and year
  • Information on investments, if any. The capital gains could have been invested in stocks, debt funds, equity funds, real estate, gold, or fixed maturity plans.

After you entry of the data, the following information will be produced to determine your due capital gains:

  • The Investment Kind.
  • Gain Category (Whether Short Or Long-Term).
  • Index Of Price Inflation In The Year Of Purchase.
  • Index Of Cost Inflation For The Sales Year.
  • Difference Between The Sale Price And The Buying Price.
  • Difference Between Making A Buy And Making A Sale.
  • Purchased Index Cost.
  • Capital Gain Over The Long Term Without Indexation.
  • Capital Gain Over The Long Term Using Indexation.

Concept of Capital Gain and Cost Inflation Index

Over time, the inflation rate is likely to increase. It is sensible to consider the same while calculating one's tax due and attempting to develop an index cost for capital gain. The Cost Inflation Index (CII) is usually used to gauge inflation. The most recent Cost Inflation Index created by the Government of India is used to calculate the long-term capital gain index.

Calculating the index cost for capital gain is helpful. So to speak - 

  • People must learn the indexed cost of an asset in order to determine long-term capital gains.
  • An intended seller would have to multiply the purchase price of their property by the cost inflation rate determined for the fiscal year (the year when the transfer is to be made).
  • The numerical result would then require division by the CII number assigned for the year of purchase.

For Instance,

If Mr Bushan bought a housing property on April 26, 2004, for Rs. 50 Lakh and sold it on July 26, 2018, for RS. 90 Lakh, the indexed cost of acquisition would be –

(Cost of acquisition x CII at the time of sale)/ CII at the time of purchase

(Rs 50 lakhs * 280)/ 113= 123.89 Lakhs

Henceforth, the capital gain would be = Rs. (123.89 - 90) lakhs= Rs. 33.89 Lakhs

The capital gain index chart is shown below.

Financial Year  Capital Gain Index
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
2021-22 317
2022-23 331

Source: Income tax

Capital Gain Exemptions With Regard To Residential Property

The exemptions from capital gains are listed below.

  • Section 54 exempts capital gains from tax on the sale of a single-family home. The tax exemption is permissible if the funds from the sale are used to purchase another residential property.
  • Section 54F exempts capital gains on the sale of any asset. And the money from the sale is used to purchase a house.
  • Capital gains exemption on the sale of real estate under Section 54EC. Additionally, certain bonds are purchased with the selling profits. The Rural Electrification Corporation or the National Highway Authority of India (NHAI) issues these bonds (REC). Only when the criteria are met does the tax exemption become valid.

Frequently Asked Questions

How can I figure out my mutual fund's capital gains tax?

While long-term capital gains tax does not apply to equities mutual funds, short-term capital gains tax is paid at 10% on all holdings; however, individuals must report income from these investments when filing IT returns. Gains from the transfer or sale of non-equity or debt mutual funds are subject to a 20% tax with indexation.

Long-term capital gains are considered income?

If long-term capital gains satisfy specific requirements and the profit generated does not exceed the total taxable income, no taxes will be due. Depending on factors like age, salary, and other factors, the taxable income varies from person to person. It will be taxed if the profit received exceeds the total taxable income.

How are RDs taxed?

Investments made through RDs are not eligible for tax breaks under Section 80C of the Income Tax Act. Therefore, interest earned on RD investments is taxed. The rate of taxation for the individual's income tax bracket applies to the interest on RDs. Furthermore, a 10% TDS (or 20% if a Pan Card is not given) is applied to the interest income. The TDS threshold is INR 40,000 for AY 2020–21. (INR 50,000 in the case of senior citizens).