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https://financialsafari.wordpress.com/2015/10/14/a-laymans-guide-to-capital-gains-and-indexation/
10/16/2015
equity based asset such as Equity MF or a Balanced MF where the equity holding is more than 65
%.
It would be nice if LTCG for other assets were like equity but it is unfortunately not so. For Real
estate and Debt instruments the LTCG applies only after 3 years. So if you invest in a debt MF
today and redeem it in less than 3 years, the gain you make will be STCG and get added to your
income. Also, unlike Equity the LTCG is not exempt from tax. However, recognizing the fact that
inflation will have an impact on dampening the gain, a concept of indexation is used to calculate
LTCG. The way this works is explained below:Cost Inflation Index of the year 1981-1982 is taken as 100. Based on inflation from that point
the index is revised every year. The current index for 2015-16 is announced at 1081.
What this really means is an asset bought in 1981 needs to be indexed at around 10.81 times, in
order to counter the effect of inflation, the asset cost in 1981 needs to be multiplied by 10.81 to
get a fair value of cost in 2015.
The LTCG can now be calculated with this indexed acquisition cost figure.
For example I purchased my flat in Chennai for 35 lacs in 2003-2004 when the Cost Inflation
Index was 463. If I want to sell it in 2015, when the Cost Inflation Index is 1081, the indexed
purchase cost will need to be calculated by using the formula 1081/463 x 35 lacs. So the indexed
cost will come out to be 81.7 lacs.
So if I sell my flat for 1 crore today, the LTCG will be 18.3 lacs.
This then will be taxed at 20 % in the relevant year of sale.
How does indexation help in debt investments and how are things changing on that front? I will
try to address this in the next post.
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10/16/2015
1. Sunny says:
October 15, 2015 at 5:26 am
Thanks for writing this piece of article. Worth to bookmark this blog
Reply (https://financialsafari.wordpress.com/2015/10/14/a-laymans-guide-to-capital-gains-andindexation/?replytocom=605#respond)
2. Renga says:
October 15, 2015 at 11:40 am
Nice article, I think it should be 1081/463 x 35 lacs as opposed to 1085/463 x 35 lacs??
Also how often the Cost Inflation Index changes? And how is this figure controlled?
Reply (https://financialsafari.wordpress.com/2015/10/14/a-laymans-guide-to-capital-gains-andindexation/?replytocom=606#respond)
Rajshekhar Roy says:
October 15, 2015 at 12:03 pm
Yes you are correct, will change it. The index is announced yearly and is primarily based on
inflation.
Reply (https://financialsafari.wordpress.com/2015/10/14/a-laymans-guide-to-capital-gains-andindexation/?replytocom=607#respond)
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