Mar 06, 2017 03:07 PM IST | Source: Moneycontrol.com
How changes in capital gains norms impact your portfolio
The year for the base of indexation has been brought forward to April 2001 which means that any asset bought before this date can calculate the cost as either as actual cost or the value as on this date whichever is higher.
One of the biggest changes for investors in the times ahead will come in the area of capital gains. The change in the base year for the calculation of indexation will mean a different manner in which the entire capital gains are calculated. This will require individual taxpayers to be careful about the manner in which the workings would come in and the way in which they can ensure that the tax liability that they face is limited. Here is a look at the manner in which things will change for the investor going ahead.
Long term capital gains
Capital assets which are held for a period of more than a certain time like two years for a house property (three years till March 2017) or three years for gold would be classified as a long term capital assets. The gains that arise on the sale of these assets would be called as long term capital gains and the benefit of this is that there is usually a lower rate of taxation on this gain.
Long term capital gains have an added benefit of indexation wherein the cost of the purchase of the asset is raised for the period of the holding based on the inflation during that period. The inflation is represented by the cost inflation index announced by the Central Board of Direct Taxes. This makes the process transparent for the individual who can take a look at their purchase price and date and make the necessary calculations to see the kind of gains that they have earned.
The earlier series of cost inflation index that was being issued by the tax department was from 1 April 1981. This meant that for assets that were bought after this date the individual could use the relevant year and the applicable index number. On the other hand when it came to assets that were bought before this time period the taxpayer had the choice of taking either the actual cost that they had or the value as on April 1, 1981 for the purpose of their cost. While this took care of a lot of old assets there was a problem for many purchases after this date too as a long time period has passed since then and it might not be possible to get the actual cost for the purpose of the calculations. Now the year for the base of indexation has been brought forward to April 2001 which means that any asset bought before this date can calculate the cost as either as actual cost or the value as on this date whichever is higher.
This changes the entire manner in which the tax is calculated as it provides a big relief to the individual in terms of the ability to make the calculations. At the same time if a person takes the value as on 1 April 2001 then there is a chance that they can get a higher cost as compared to what they might have actually spent for this purpose. If this is the case then a higher cost will mean that a lower amount will be taxable and this will lead to a lower tax burden for the individual. The lower tax burden would be a relief as the individual might end up paying less or they might have to set aside a lower amount as compared to what they would normally have done so earlier for the purpose of saving the tax. The exact extent to which the savings might be present is not easy to understand but there are chances that where the asset was bought earlier and is in the nature of property then the change in cost could be significant.