Capital gains affects everyone. Here, we give you the complete low-down:  

1. What is capital gain?

Certain possessions are considered assets. Property (house or land), gold and investments (shares, mutual funds, bonds) are some examples.

When you sell them and make a profit on the sale, it is known as capital gain. The tax you pay on this profit is called the capital gains tax.

If you make a loss (you sell at a lower price than you bought it), you incur a capital loss.

2. What are the types of capital gains?

There are two types of capital gain; the kind of captial gain you incur is determined by how long you hold the asset.

Short-term capital gain:
If you sell any asset within 36 months from the date of purchase
If you sell shares or equity mutual funds within 12 months 

Long-term capital gain:
If you sell any asset after 36 months from the date of purchase
If you sell shares or equity funds after 12 months 

3. What is the tax on equity?

Short-term capital gains on equity is 10%. If you sell it after 12 months and it is a long-term capital gain, then you will not have to pay any tax.

4. What is the tax on assets other than equity?

If it is a short-term capital gain, then the profit is added to your total income and you are taxed in whatever bracket you fall under.

If it is a long-term capital gain, then you are charged either 20% with indexation or 10% without.

5. What is indexation?

This is the process by which inflation is taken into account. This is good because it reduces the amount of capital gain and the amount you end up paying as tax.

Let's take an example of a house purchase.

Purchase price: Rs 2,50,000
Purchase date: June 20, 1996
Sale date: January 20, 2005
Sale price: Rs 4,50,000

Since the house was sold over 36 months after being bought, the capital gain will be long term.

First, you calculate the Cost Inflation Index. These indices are fixed and declared by the Central Government every year (see table below).

Cost inflation index
Index of the year it was sold / index of the year it was bought
2004-05 index / 1996-97 index
480 / 305 = 1.57377

Indexed cost of acquisition
= Buying cost x CII
= 250000 x 1.57377
= 3,93,443

Long-term capital gain
= Selling price � Indexed cost 
= 4,50,000 � 3,93,443
= Rs 56,547

Capital gains tax will be 20% of Rs 56,547 ie Rs 11,310.

6. What is the Cost Inflation Index over the years?