With prices of vacant plots, constructed houses and used apartments across the board escalating to new highs, the tax angle becomes very important to understand. Whether the tax has to be paid on the entire sale proceeds or only on the gains, how much to pay or how the “with indexation” benefit would help in arriving at the actual tax obligation are all questions that linger in the minds of sellers.
Capital Gains are of two types – Short-Term and Long-Term. For example, when you sell your asset such as a real estate property within 36 months from the date of purchase (as per the date documented in the Sale Deed) and if it results in a gain, such gain gets classified under Short Term; and if the same happens after 36 months then it would be treated under Long Term.
Since inflation reduces the value of an asset over a period of time, the Income Tax Department has given an opportunity of reducing the tax burden on such long-term gains what is termed as “Indexation”. This facility allows the seller to increase the purchase price of the asset he has sold that leads to paying lower taxes.
The law allows to inflate the cost of your asset by a government notified inflation factor and this factor is commonly known as “Cost of Inflation Index” or CII. This facility helps erosion of value in the price of an asset and brings the value of an asset (in this case, property) at par with prevailing market prices.
Such cost of inflation is notified by the government every year which usually would be in an ascending order due to higher inflation impact.
The last 12 years’ CII table is shown in the graph.
Computation of Cost of Inflation Index:
Inflation Index for the year in which the property is sold (divided by) Inflation Index for the year in which the property was bought (multiplied by) cost of the asset = Inflated Cost
If the asset was purchased in 2005-06 for Rs.10 lakh and sold in 2014-15 for Rs.25 lakh, it can be calculated as:
1024 / 497 x 10,00,000 = 20,60,362.
Calculation of Long-Term Capital Gain Tax using Indexation (termed as With Indexation Benefit):
Selling price of the property (minus) Indexed cost = Capital Gains
i.e., 25,00,000 – 20,60,362 = Rs.4,39,638
Tax Liability = Rs.4,39,638 x 20% tax = Rs.87,928.
In case some money would have been spent at the time of acquiring the property as well as at the time of selling it on expenses related to registration charges, real estate broker’s commission, legal expenses etc., it can be added to the overall cost of the asset while arriving at the actual acquisition cost and actual selling price.
If money was spent on any home improvement between the year of acquisition and year of sale (in this case between 2005-06 and 2014-15) then the CII for that year too would be considered while arriving at the capital gain calculation. All these would help in reducing the tax burden.
Simple formulaThe details of Cost of Inflation Index are available on the Income Tax website and a chartered accountant too would provide such information. It is easy to compute since the formula itself is quite simple to arrive at the tax obligation.
On short term capital gains arising out of sale of property the tax obligation would be as per the slab under which the individual is categorised; i.e. 10%, 20% or 30%.
