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Capital Gain Tax With Indexation Benefits

Today I am going to tell you what are the indexation benefits of Capital Gains, but before we look into benefits its worth to understand what is Capital Gain, It’s the profit or gain made by you in long term either by holding or selling your fixed assets like land, buildings, machines and so on.

Any assets held by any assesse is capital but few items are not included as capitals like Agricultural Land, Stocks in trade, Jewelry and Art or Drawing.

So in simple terms we can say appreciation in the value of capital from its purchase is known as capital gains. Capital Gains is on 2 types :-

  • Short Term
  • Long Term

Short term Capital Gain Means a capital asset held by an assesses for not more than 36 months, But for following assets this time period is 12 months not 36 months :-

  • Shares,
  • Securities listed in a recognized stock exchange,
  • Unit of UTI
  • Mutual funds specified in u/s 10(23D)
  • Zero Coupon Bond
  • Short term capital assets


Tax Application On Short term Capital Gain :- Tax is applicable as per Tax slab of individuals

Long term capital gain means if gains arising when any assets is sold by 36 months or 12 months for above listed items.

Tax Application On Long Term Capital Gain:- It will be 10% on gain or 20% on the gain made after consideration of index cost of acquisition.

Computation Of Capital Gain :-

Short term :- Deduct from the full value of the consideration received or accruing as a result of the transfer of the asset the following amounts ;-

  • Cost of acquisition of the asset,
  • Cost of any improvement, if any
  • Expenditure incurred wholly and exclusively in connection with transfer,

Formula :-

Capital gain = Full value of consideration – (Cost of acquisition + Cost of improvement + Selling expense)

Set-off of Short term Capital loss :-  If there is any losses on the transfer of short term capital asset the such loss can be set-off against any other short term capital gain or long term capital gain.

Long Term :-  Before we go ahead we first need to understand that by passage of time value of money decrease, means if you could buy a particular thing of Rs. 1000 then you could not buy same thing after 5 years for same Rs. 1000. This this due to the inflation, rising cost of products and decrease in purchasing power.

That’s why Government release Index Cost for that Year. Index cost is used to calculate the current value of asset or same which was purchased some time ago.

For ex if you had purchased a land for Rs. 1 Lakh 10 year ago, then its current value will be different which can be calculated with the help of Index cost.

Now lets see how can we calculate Long Term :- Deduct from the full value of consideration :-

  • Index cost of acquisition of asset,
  • Index cost of any improvement of asset,
  • Expenditure incurred wholly and exclusively in connection with transfer

cost inflation index

Set-Off long term capital loss :- If there is long term capital loss on transfer of long term capital asset, then it can be set-off only against any other long term capital gain.

How To calculate Index Cost Of Acquisition :-

Cost * Cost inflation index for the year in which asset is sold/ Cost of inflation index for the first year in which asset was held

For E.g. :- If you had bought a land for Rs. 10,000 in 1981 and sold it for Rs. 1,00,000/- in 2009 then its Index cost of acquisition will be :-

(10,000) * 632/100 = 63200

So today’s value of that land which you had purchased for Rs. 10,000/- back in 1981 is Rs. 63200/- and if you sold it for Rs. 1,00,000/- then you will make profit of Rs. 36800/-

How To Calculate Index cost of improvement :-

Cost of improvement*Cost inflation index of for the year in which asset is sold/Cost inflation index for the year in which the improvement to asset took place

For Eg :- You had purchased a land for Rs.2,000/- back in 1981 and in 1991 you spend Rs. 1000/- on its improvement and sold in next year, then :-

500 * 223/199 = = 1120

If you want to avoid tax from long term capital gain then you can take exemptions from Sec 54, Sec 54B, Sec 54D, 54EC, 54 F, 54G, depending upon your asset type.

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