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Your queries on capital gains answered

Relax With Tax | January 04, 2006

You have a question about house rent allowance, medical allowance or even a general tax query.

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Itook a loan to buy a home.

Now, I want to sell the house and repay the entire loan.

After I repay the loan, is the amount that I am left with taxable? If yes, how much?

- Sarika Shinde

You have not said for how long you held the house. But yes, you will have to pay tax, more precisely referred to as capital gains.

Capital gains is the broad difference between the acquisition cost (cost at which you bought the house) and sale consideration (cost at which you sold it).

The tax you pay on this profit is called the capital gains tax.

Depending on how long you held the asset, the capital gain is classified either as short-term or long-term.

Short-term capital gains

If you sell the asset within 36 months from the date of purchase (12 monthsfor shares or mutual funds), you will have to pay short-term capital gains tax.

The short-term capital gain will be added to your total income.Depending on which tax bracket you fall under, you will be taxed.

Long-term capital gains

If you sell the asset after 36 months from the date of purchase (12 monthsfor shares or mutual funds), you will have to pay long-term capital gains tax.

Where long-term capital gains is concerned, indexation is applicable. What it means is that inflation is taken into account to reduce your tax.

How indexation takes place

The Cost Inflation Index is fixed and declared by the central government every financial year (April 1 - March 31). Here is the CII for the various financial years.

FY

CII

FY

CII

1981-82

100

1993-94

244

1982-83

109

1994-95

259

1983-84

116

1995-96

281

1984-85

125

1996-97

305

1985-86

133

1997-98

331

1986-87

140

1998-99

351

1987-88

150

1999-00

389

1988-89

161

2000-01

406

1989-90

172

2001-02

426

1990-91

182

2002-03

447

1991-92

199

2003-04

463

1992-93

223

2004-05

480

Let us take an example to illustrate this point.

You bought it for

Rs 10,00,000

On

May 1, 1996

You took a loan of

Rs 8,00,000

You sold the house for

Rs 16,50,000

On

April 1, 2004

Brokerage paid

Rs 50,000

Net sale consideration

Rs 16,00,000

Cost Inflation Index 1996

305

Cost Inflation Index 2004

480

Inflation adjusted cost

10,00,000 x 480 = 15,73,771 305

Adjusted Capital Gain

16,00,000 15,73,771 = 26,229

In this case, the gain that is taxable is Rs 26,229.

In reality, the tax leviable would depend upon other heads of income.

There are five heads of income:

1. Salary
2. Profits from business or profession
3. Income from house property
4. Capital gains
5. Income from other sources

The taxable income from each source is to be computed under each head of income by allowing deductions. Then they are aggregated (added together).

Let's say that you get an income from salary, interest income and capital gains.

The taxable income under the head 'Salaries', then 'Income from other sources' and then 'Income from capital gains' will be computed.

Thereafter, all the three incomes under the three heads would be aggregated.

From this amount, certain eligible deductions would then be deducted to arrive at the net taxable income on which tax is chargeable.

The general rate that would be applicable in your case is 20% (plus surcharge plus education cess as may be applicable). There is, however, certain relief available from such tax but too detailed to be discussed here.

I would like to know whether capital gains tax is applicable when you switch from one mutual fund to another (of the same or another company) within a year of investment.

I am presuming that the investment has appreciated.

- P R Venkateswaran

Yes.

Switch in and switch out would be treated as transfer for the purpose of deciding whether a transaction is liable to capital gains tax.

In case of switch in/out, an individual merely moves out of one fund and moves into another fund.

Let's take an example:

NAV
(Rs)

Units

Value (Rs)

Holding in ABC-Income Fund (Switch Out Unit)

12

100

1200

ABC-Global India Fund (Switch In Unit)

15

80

1200

In the above example, the individual effectively sells a particular unit and buys another unit with the sale proceeds. Please note that the money does not flow into the hands of the investor but the sale proceeds is reinvested in another unit that may have a unit value higher/lower than the one being sold.

Accordingly the number of units may be reduced/increased due to the unit NAV.

Got a question for Relax With Tax? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Illustration: Dominic Xavier



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