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Long term capital gains tax: Calculation Sheet

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This calculation sheet is applicable on both equity and equity mutual funds.

With Budget of 2018, we now have tax on Long Term Capitals Gains (which was earlier 100% tax free). Long term capital gain is gain you make from holding any equity or equity mutual fund unit for more than an year.

The reason you need this guide is the way indexation factor works in case of LTCG for equities as per the new law. LTCG is there for other assets also but the time period for any asset to qualify for being considered as Long term is different. For real estate it is 3 years.


What is indexation in calculating long term capital gain tax?

In short indexation is calculating the cost of buying a share by adding a certain inflation adjusted price to the original price you paid for buying that share.

This part was not important earlier, because the income being completely tax free, you don’t need indexation. Actually you would want to report the minimum price possible(which was actual price of buying that share), so that you can show higher tax free profit for that asset.

But now that the ‘long term capital gain’  part is taxable, you would like to show minimum possible gain, for obvious reason of saving of tax payable.

This is where indexation comes into the picture.

But, don’t be excited as yet. The indexation in capital gains tax is minimal for now and you will be able to use it for stocks you already hold in your account. Not that you buy on or after 31st Jan 2018.

How to arrive at value for indexation

So for LTCG, as per budget 2018, the indexation allowed is:

The cost of acquisition of the share or unit bought before Feb 1, 2018, will be the higher of :
a) the actual cost of acquisition of the asset (purchasing of the share or equity mutual fund unit)
b) The lower of : (i) The fair market value of this asset(highest price of share on stock exchange on 31.1.2018 or when share was last traded. NAV of unit in case of a mutual fund unit) and (ii) The sale value received/accrued when the share/unit is sold.

Now, let’s see how to use these indexation values.

How to calculate taxable gain for long term capital gains tax?

When you hold any equity or equity mutual fund unit for more than 12 months, then it qualifies as long term holding.

The new tax law for LTCG tax says that any gain over an above Rs. 1,00,000 (one lakh) in a single financial year is taxable at rate of flat 10% of realised gain. 

For LTCG tax related to equities, there is no table for indexation. All indexation in all equity holding is grandfathered upto 1st Feb, 2018.

Important: As there is single date for indexation purpose, it makes sense to note down the highest price of stock as it traded on 31st January 2018 (or when the share last traded before that).

For example:

If you bought some share for Rs. 200 and till 31st Jan 2018 the holding time is more than 12 months, then it qualifies for LTCG.

Now, let’s say you are planning to sell this stock on 1st June 2018 (01.06.2018). The price that the stock traded on 31.01.2018 was Rs. 300.

If you sell for Rs. 370, then your cost of acquisition will be taken as Rs. 300 and the profit will be Rs. 70.

At selling price of Rs. 300, the cost of acquisition will be Rs. 300 and realised profit will be Rs. 0.

If you sell at Rs. 210, then the cost of acquisition will be Rs. 210 and realised profit will be Rs. 0.

At selling price of Rs. 190, the cost will be Rs. 200 and again profit will be Rs. 0.

Now the important thing here is that this is only for equity stocks purchased before 31st Jan 2018. If you purchase any share after or on 1st feb 2018, there is no indexation benefit. Your realised gain will be difference between buying price and selling price.

Calculation sheet for Mutual fund units

One line: There is no indexation available for mutual fund units. Nil.

Which means you calculate your gain by: Selling price – actual cost of acquisition.

So, you take your net realised gain, subtract Rs. 1,00,000 (if the gain is more than that) and pay 10% on the remaining gain.

In case of any clarification, or share your opinion, please use the comment section below.

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