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Long Term Capital Gains

A simple concise guide on how to minimize the tax liability on your long-term capital gains

I purchased units of a Mutual Fund in 1998. On 24/03/1999, bonus issue was announced and for each unit held; I was allotted one bonus unit. Recently, I redeemed all the units and want to compute long-term capital gain tax on both original units as well as bonus units. I understand that there are two options, which I can use. One of the options is to calculate tax at the flat rate of 20% after taking indexation benefit. The other option is to calculate tax at the rate of 10% without taking advantage of indexation. Can I opt for fist option for original units and second option in case of bonus units?
Vivek Chaturvedi, Faridabad

Usually long-term capital gain is taxed at a flat 20% on gain arrived at after adjusting cost of acquisition and improvement with cost inflation index. However, a preferential tax treatment exists in case of long term gain arising on sale or transfer of listed securities or units of mutual funds. Firstly gain is calculated without applying cost inflation index and by calculating tax at a flat rate of 10 per cent.

In the second step, gain is calculated after applying cost inflation index, as usual, calculating tax at a flat rate of 20 per cent. The lower of the two alternatives is your tax liability. Thus the investor is neither free to choose, as suggested by you, from either of the two options, nor can he opt for different methods for listed securities. In-fact this provision is quite investor friendly and will help you minimise your tax liability.