Page 79 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes All Other Capital Assets

Short-term Capital Gain (STCG)
If the capital asset is held for less than 36 months before selling, the gain arising from it is
classified as Short Term Capital Gain. This short term capital gain is clubbed with your income
for the year, and is taxed at a rate as per the applicable tax slabs/brackets.
Short Term Capital Gain = Sale Price – Purchase Price
This is true even for shares or equity mutual funds sold off market.

Example: When a company comes out with a buyback offer, or when a company taking
over another company comes up with an open offer, and you tender your shares to the company
directly, any gain arising out of this would be taxed as if the sale was of “other capital asset”, and
would be clubbed with your income for the year of sale for the purpose of calculation of income
tax.
Long-term Capital Gain (LTCG)

If the capital asset is held for more than 36 months before selling, the gain arising from the sale
is classified as Long Term Capital Gain.
In case of assets other than equity shares or equity MFs, the long term capital gain is taxed at
20%. In other words, 20% of the long term capital gain has to be paid as income tax. (In case of
debt mutual funds, the capital gain tax is 10% if the cost of acquisition is not indexed, and it is
20% if the cost of acquisition is indexed). We know that the cost of money decreases over a
period due to the effect of inflation. Thus, an amount some years back can’t be compared directly
with an amount today – ` 100 were worth a lot more in 1985 than today!
So, we first need to make the purchase price comparable to today’s price. For doing this, we need
to use the inflation figures from both these years.
But the Reserve Bank of India (RBI) has made our task easy here – for every year (starting in
1980), they have come up with a number. This is called the Cost Inflation Index.
The Cost Inflation Index in itself doesn’t convey anything – but the increase in the number from
one year to another is a representative of the change in prices (and therefore, inflation) between
these years.
The purchase price that needs to be used for calculating the long term capital gains is thus called
the Indexed Cost of Acquisition.

Indexed Cost of Acquisition = Actual Purchase Price × (Cost Inflation Index during
the year of sale/Cost Inflation Index during the year of purchase)
And,

Long Term Capital Gain = Sale Price – Indexed Cost of Acquisition
Also, in case of a house, you can add the cost of improvement (incurred during your ownership
of the house) in the cost price of the house. Again, this cost can be indexed (and therefore,
increased!).

4.6 Sources of Credit and Credit Alternatives

The credit market structure in India has evolved over the years. A wide range of financial
institutions exist in the country to provide credit to various sectors of the economy. These

74 LOVELY PROFESSIONAL UNIVERSITY