​Deduct expenses incurred on sale of the asset from sale proceeds to arrive at the actual capital gains amount to find out the real profit/loss made and your tax liability. Brokerage, stamp duty, spends on home improvements are examples of these expenses. Moreover, the indexed cost of acquisition of property has to be considered when one earns long term capital gains.
Short-term capital gains are taxed as per the income tax slab rate and long-term capital gains are taxed at 20% after indexation.

​Let us look at a couple of examples -                                     
1) Shiveta bought a house in 2015 at a cost of ₹ 23,00,000. She spent ₹ 2,00,000 in repairs in 2017. She sold the house in 2018 for ₹ 28,00,000 incurring sale related expenses amounting to ₹ 55,000. What are her capital gains?

​The profits she earns will be long-term capital gains as she owned the property for more than 24 months. 

Since it is a short term capital gain, cost of indexed acquisition is not applicable. Abhishek earned short term gains of ₹ 3,20,000. He is liable to pay tax of ₹ 96,000 on it.

Tax Exemptions
There are tax exemptions applicable for capital gains from sale of property -

Section 54
There is exemption of tax on long term capital gains from the sale of house property provided you invest in a maximum of two house properties. This is applicable if capital gains on the sale of house property does not exceed ₹ 2 crores.
​
Section 54EC
If a tax assessee invests the capital gains from sale of the property into specific bonds, he/she gets tax relief. Up to ₹ 50,00,000 can be invested in infrastructure bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). Remember to invest within 6 months of earning capital gains. Complete the transaction before filing taxes for that financial year. The bonds have to be held for five years from the date of sale of the house else the provision is not applicable.
​
There is no tax applicable on inherited property. NRIs have to pay taxes on gains made on the sale of property in India.

Executive Summary: There is a lot of debate and discussion on the recently added tax – LTCG. It means that we have to pay 10.04% tax on capital gains. Are there ways to reduce this tax outgo? It is a cash outgo that you have to bear. You can increase your investments, manage your investments such that the outgo is reduced to lessen the impact of LTCG.

​As per the Budget announcement in February 2018, when you sell stocks or equity mutual funds and and earn gains more than Rs. 1,00,000, you will have to pay 10.04% (including cess) as tax. This is applicable on all transactions from Feb 1, 2018.

What does it mean for Retail Investors invested in Stocks and Equity Mutual Funds?
The gains made by retail investors in the stock market till 31st January, 2018 will not be subject to tax.
The gains made by Equity Mutual Fund investors in Equity Mutual funds till 31st January, 2018 will not be subject to tax.

Here is an example of how LTCG affects our investments -

Here the original investment of Rs. 200,000 in an equity stock has been steadily growing at 12%. As you can see in the first 3 years, there is no tax payable as capital gains up to the extent of Rs. 100,000 is exempt. In the 5th year, you have to pay tax and the adjusted returns after tax paid is 11.73% and in the 10th year, the returns drop to 11.42%.
To escape tax, you can sell it at the end of 3 years. But then you should make sure you invest the sales proceeds in an equally well-performing asset.
If you continue to remain invested, the returns do get impacted but it is not a big factor that warrants for a major change in your investment strategy. 

Many people are not too happy about one more income stream getting taxed. There is no way to avoid paying the tax but we can try to reduce the impact of the LTCG on our finances -

Stay Invested for the Long-Term – In the long term (more than one year), gains over Rs. 1,00,000 will be subject to tax. But the longer you stay invested, the power of compounding will enable you to earn optimum returns as the investment is for a longer term and the returns in the form of value appreciation that are reinvested stay invested for a longer term. In case of selling in the short-term, the tax payable is more and you have to bear transaction costs and also invest time and effort in choosing the right stock. 

Manage Your Investments – If you want the same returns as the previous years, you have to increase your investment by 10%-12% so that the absolute returns are not affected. You can increase the amount in SIPs and increase your allocation to equity based assets. Consider ELSS mutual funds as they are tax savers. 
If you have been withdrawing profits from different mutual funds using the SWP scheme, check if you really need to do that and check the amount.

Use Your Losses – Have you made losses in the financial year in any capital assets. These can be set off against the profits that are taxable. So use these losses to reduce your tax liability.
it is large as the tax outgo is Rs 1 lakh per financial year and reduce LTCG tax outgo 

Churn Your Portfolio? – Many people advice to reduce your tax liability is to book profits up to Rs. 1,00,000 and then invest the profits into another asset that gives similar or more returns or in the same asset. It is also advised to keep a gap between the sale and re-purchase transactions so that there is no confusion over tax liability. This strategy can be applied to stocks provided you are able to buy stocks at the lowest level each time. This is usually not possible. Moreover the stock market is volatile which makes such buying and selling decisions difficult. In case of Mutual Funds, if you have booked profits, it means the NAV value is higher. If you are investing in the same MF scheme, you should consider why the NAV is higher? Is it just because of the market buoyancy or the value per unit is really worth the NAV?
Your returns will not be at the optimum levels unless the markets perform extremely well in that period when you hold it. This cannot be predicted accurately. 
One has to consider the transaction expenses, transaction taxes and effort and time spent in this exercise and evaluate if it is a better option than paying 10.04% tax. Churning of portfolio is not a great option if the investment is large as the expenses, time and effort will be more and you will lose out on compounding effect of investment returns.

Executive Summary: Gains which arise on the sale of assets is known as capital gains, which can be short term or long term in nature, depending on the period of holding. Tax paid on capital gains is known as capital gains tax. Capital gains tax rate is different for short term and long term capital gains. The tax rate also differs depending on the asset category. One can reduce or eliminate the capital gains tax burden by investing in certain specified assets under various provisions of the Income Tax Act. 

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Capital Gains can be quite a tricky subject to deal with. When one sells an asset at a price which is higher than the purchase price, capital gains is said to have arisen. Logically, the converse (sale price being lower than the purchase price) results in capital loss. Capital gains usually occur in the case of sale of shares, mutual funds and property. When there is a capital gain, it is required to be taxed, and this is known as capital gains tax.

The treatment of capital gains tax under Indian laws is different for shares / equity mutual funds compared to other assets. Not only are the tax rates different, but also the classification of the gain as short term or long term differs for shares / equity mutual funds and other assets. Capital gains can either be short term capital gains or long term capital gains. The classification is as below:         

Computation of Capital Gains: Capital Gains are calculated by comparing the sale consideration received with the purchase price of the asset. In addition, one is allowed to deduct any expenditure incurred for the sale of the asset and the cost of improvement of the asset (if any). If one is eligible to claim an exemption under any of the sections available under the Income Tax Act, this can be further deducted from the gross capital gains. This amount of net capital gains will then be subject to capital gains tax.

Indexation: If the asset is a long term capital asset, one is allowed to use the ‘indexed’ value of the asset while computing the cost of acquisition (purchase price) of the asset. So what is meant by indexation? Indexation means the cost inflation index is adjusted to reflect the increase in price of asset from the date of purchase to the date of sale. This cost inflation index is issued by the Government. Using indexed value of the asset reduces the capital gains incurred, as the cost of purchase is increased to reflect inflation. Note that this option is available only for long term capital assets. Again, this is just an option. If one does not wish to use indexed values, the tax rate intuitively becomes lower in this case.

Tax Rate applicable on different asset categories: As mentioned earlier, the tax rates are different for different assets and also depending on the nature of capital gains (short term or long term). The table below gives an account of the different capital gains tax rates and the necessary conditions:

(1) Transaction should be entered on or after 1st Oct 2004 and subject to Securities Transaction Tax

Exemption from Long Term Capital Gains Tax:  The amount of long term capital gains tax to be paid usually works out to be quite substantial. The Government has allowed the assessee to claim exemption in the long term capital gains, provided the gain amount is invested in certain avenues. Various sections of the Income Tax Act such as Section 54, 54B, 54D, 54EC, 54F, 54G and 54GA deal with such exemptions. Each section comes with its own set of conditions to be satisfied in order to claim exemption. In case the new asset is not acquired before the due date of filing returns, the amount of capital gains should be temporarily invested in a special account known as the Capital Gains Account Scheme, which can be either a Savings Account or a Deposit Account. When one wishes to invest in the new asset to claim exemption, the amount can be withdrawn from this account and invested. Any unutilised amount is chargeable to capital gains tax.

Tracking Capital Gains: The tax to be paid on the capital gains earned is not deducted at source. This should be declared and paid by the assessee himself. Therefore it is important to record and keep a track of the short term and long term gains earned. One can keep a track of this by maintaining a simple excel sheet in which the records of assets sold and other details can be recorded. There are online calculators which can help one to determine the amount of tax to be paid on various categories of capital gains. If capital gains are to be paid on sale of mutual fund units, one can get these details by contacting the respective fund house or on websites of Registrars like Karvy and CAMS. If these sources do not provide this information, one can also contact his/her brokerage house for this information. It is always better to have an idea of how much one earns as gains and the tax to be paid on these gains, before the transaction is made. Also, keeping a track on a regular basis helps in keeping a control on the amount paid as tax.

It is recommended that investors should consult a qualified chartered accountant to understand the prevalent tax rates and tax implications. This analysis is valid only on the date being published.                                                                                                                                                                                                    
The author can be reached at smitha@gettingyourich.com