Capital gains are any profits made by selling capital assets, such as equities, property, land, gold, etc. Under Indian income tax laws, you need to pay income tax on capital gains. The tax calculation is dependent on whether you have held the asset for a long term or short term as defined by tax laws.
Long-Term capital gain is the profit made on selling of assets, which were held for a long term according to income tax rules. The definition of long term varies by assets as listed below.
| Equity Debt Bonds | More than 1 year |
|---|---|
| Real Estate Gold | More than 3 years |
So if you make any gains by selling equity, debt or bonds after holding them for 1 year, such gains will be considered as long-term capital gains. Similarly, if you hold gold and real estate for more than 3 years, and subsequently sell it for a profit, such gains will qualify as long-term capital gains.
Tax on long-term capital gains tax varies by the type of assets. For certain assets like equities and bonds, calculation of long-term capital gains tax is fairly simple.
| Equity | No long term capital gains tax |
|---|---|
| Bonds | 10% of gains |
Example 1: Let's say you sold some bonds for a gain of ₹10,000, after holding them for a year. Using the formula above, your long-term capital gains tax will be ₹1,000 on the gains.
However, for certain other assets, the calculation of long-term capital gains tax is slightly complex. For these assets, calculation of long-term capital gains involves something called as an 'indexation benefit.'
Example 2: Typically, gains are calculated by deducting the purchase price from the sale price. Say if you purchased some land in 1995-96 for ₹400,000 and sold it in 2004-05 for ₹800,000, you have made a gain of ₹400,000. However, due to inflation, the purchasing power of ₹400,000 is not the same as it was in 1995-96. And so it won't be fair if you have to pay tax on the entire ₹400,000.
With the help of indexation benefit, you will have to pay tax only on the inflation-adjusted gain. To arrive at the indexation benefit, you will have to use the inflation index for both the year of purchase and the year of sale. You can find the inflation index for every year on the income tax department's website.
Example 3: Continuing with the above example, the inflation index for 1995-96 is 281, and the inflation index for 2004-05 is 480.
Using the inflation index for both these years, you will arrive at the indexed or inflation-adjusted cost of the property.
Example 4: Inflation-adjusted cost = ₹400,000 (original purchase price) x 480/281 (inflation index for the year of sale /inflation index for the year of purchase), which works out to ₹683,274.
Once you get the inflation-adjusted cost, you can easily calculate the long-term capital gains with indexation benefit as ₹116,726 (₹800,000 - ₹683,274). And your long-term capital gains without any indexation benefit are ₹400,000 (₹800,000 - ₹400,000).
Depending on the indexation benefit, long-term capital gains taxes for different assets are listed below.
| Debt Gold ETFs or MFs | Whichever is lower 10% with no indexation benefit 20% with indexation benefit |
|---|---|
| Real Estate Physical Gold | 20% with indexation benefit (no option of tax without indexation benefit) |
Use our tax calculator to understand the role of long term capital gains tax on your overall tax payable.