The long and short of capital gains

Tax rates, holding period and indexation norms vary across assets like property, stocks

With the tax filing deadline fast approaching, it is time to start planning your tax returns. And as preparation, acquaint yourself with the complex capital gains tax structure first.

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Basically, capital gains tax is applicable on sale of capital assets such as property, gold, shares, mutual fund (MF) units, bonds and debentures. Depending upon the holding period, these assets are classified as long-term or short-term. The latter are those that are typically held for less three years or lesser. By corollary, assets held for more than three years are termed as long-term.

A READY RECKONER ON CAPITAL
GAINS TAX RATES
Capital asset (transaction not covered by STT)

Long-term tax rates (%)

Without indexation
With indexation
Listed stocks*
10
20
Unlisted stocks

–

20
Listed debentures
10
–
Unlisted debentures
20
–
Equity MFs*
10
20
Non-equity MFs
10
20
Immovable Property

–

20
*If transaction is covered by STT, then applicable STCG is 15%, no LTCG
# STCG for all asset types as per applicable slab rates

The only exception are shares, debentures, MF units and deep discount bonds. These assets are considered long-term in nature if held for more than a year. Shares, MF units and bonds need not be listed or quoted. Debentures, however, have to be listed to qualify for the one-year period.

Indexation
Starting with FY81-82 as the base year, the RBI notifies the Cost Inflation Index (CII) every year. Indexed cost is arrived at by multiplying the cost with the ratio of CII for the year of sale and year of purchase. Indexation essentially adjusts cost for inflation thereby reducing the amount of capital gains. For example, say a property that was purchased in April 1992 for Rs 10 lakh is sold in February 2011 for Rs 75 lakh. In this case, the capital gain would normally have been Rs 65 lakh (Rs 75 lakh – Rs 10 lakh). However, this would be unfair to the taxpayer since the value of the rupee in 1992 was not the same as it is today. Hence the cost would be suitably inflated as per the indices for the specified year. The CII for FY92-93 was 223 and that for FY2010-11 is 711. Therefore, the indexed cost in the above example would work out to Rs 31.9 lakh (Rs 10 lakh multiplied by 711/223). The resultant capital gain of Rs 43.1 lakh is much lower than the non-indexed Rs 65 lakh.

Tax Rates
Long-term capital gain (LTCG) tax rate is 20 per cent after reducing indexed cost. However, only in the case of listed securities, MF units and zero coupon bonds, the taxpayer can also choose to pay 10 per cent after reducing the non-indexed cost from the sale price, if the same works out to be lower. This is applicable only for transactions not covered by the Securities and Transaction Tax (STT). If the transaction is covered by STT, then there is no LTCG on sale of listed stocks or equity MF units. For other assets such as property or gold, the 10 per cent option isn’t available, long-term tax is payable only at 20 per cent after indexation.

Short-term capital gains (STCG) tax on listed shares and MF units is 15 per cent. For other assets, the short-term gains are simply added to the other income and taxed as per slab applicable.

Saving Capital Gains Tax
One cannot save on STCG tax. But, depending upon the asset, LTCG tax may be saved by making certain investments. So, LTCG from sale of a residential house may be saved by investing the gains in another residential property, either one year before or within two years after sale. LTCG on assets other than a residential house may be saved by investing the net sale consideration (and not the capital gain), in another residential property again one year before or within two years from date of sale. If only a part of the consideration is used to buy the new property, proportionate deduction will be available. LTCG tax payable on sale of any asset may be saved by investing the gain amount in bonds under section 54EC. NHAI and REC issue such bonds and a maximum of Rs 50 lakh can be invested in a single financial year.

The writer is director, Wonderland Consultants

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