InvestorQ : How to actually use cost inflation index put out by the CBDT each year to calculate my long term capital gains?
Abhisha Yadav made post

How to actually use cost inflation index put out by the CBDT each year to calculate my long term capital gains?

Answer
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Niraj Mehta answered.
1 year ago


Let us understand the application of cost inflation indexing by considering an example of property sale after 10 years. Consider the table below, which captures the impact based on some select assumptions…

Transaction

Amount

Capital Gains Calculation

Amount

Date of Purchase

15th May 2008

Gross Capital Gains

Rs.92,00,000

Property Cost

Rs.75,00,000

Index Value 2008-09

137

Registration & stamping

Rs.5,00,000

Index Value 2018-19

280

Acquisition Cost

Rs.80,00,000

Index Factor – (280/137)

2.0438

Date of Sale

18th May 2018

Indexed Cost of Buy (B)

Rs.1,63,50,400

Sale Price

Rs.1,75,00,000

Indexed LTCG (A – B)

Rs.8,49,600

Legal and statutory costs

Rs.3,00,000

Tax at 20%

Rs.1,69,920

Effective Sale Price (A)

Rs.1,72,00,000

Capital Gains

Rs.92,00,000

Effective tax paid

1.85%

As can be seen from the above calculation of LTCG, the indexation proffers a huge benefit when you sell any asset. You can see how the capital gains tax liability comes down in a big way due to the application of cost inflation index. By using the indexation benefit, the investor is able to reduce the effective impact of capital gains tax from 20% to 1.85%. That is how indexing helps to enhance your post-tax returns. The benefit of indexation applies to all asset classes as long as the gains are classified as LTCG. However, there is no benefit of indexation available for equity and equity funds irrespective of holding period since the blanket exemption of Rs. 1 lakh at a basic level is already given.