People buying property for investment purpose and selling it
after some time has become common among Indians in the last 10 years. I am
writing this article to know the tax implications involved in property sale
from the capital gain point of view.
What is capital gain?
A capital
gain is a profit that
results from a selling of stock, bond or real estate etc. The
gain is the difference between a selling price and purchase price. Capital
gains may refer to "investment income" that arises in relation to
real assets, such as property;
financial assets, such as shares/stocks
or bonds;
and intangible
assets.
Types of capital gain:
Short
Term Capital Gain: If property is held for less than three years before
selling it, then it is considered a short-term capital gain (STCG) and one has
to pay tax according to your normal income-tax slabs
Long Term Capital Gain: If property is sold after three years, then it's considered long-term capital gain (LTCG) and one has to pay 20% of the profit as tax.
What is Cost Inflation Index?
It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. The
cost inflation index is issued by Central Direct Board of Taxes (CDBT). Asset
purchased in 2014 normally would be higher than the year 2009. This is due to
declining price of rupee year after year.
CII
Chart
Year
|
Index
|
Year
|
Index
|
|
1981-1982
|
100
|
1997-1998
|
331
|
|
1982-1983
|
109
|
1998-1999
|
351
|
|
1983-1984
|
116
|
1999-2000
|
389
|
|
1984-1985
|
125
|
2000-2001
|
406
|
|
1985-1986
|
133
|
2001-2002
|
426
|
|
1986-1987
|
140
|
2002-2003
|
447
|
|
1987-1988
|
150
|
2003-2004
|
463
|
|
1988-1989
|
161
|
2004-2005
|
480
|
|
1989-1990
|
172
|
2005-2006
|
497
|
|
1990-1991
|
182
|
2006-2007
|
519
|
|
1991-1992
|
199
|
2007-2008
|
551
|
|
1992-1993
|
223
|
2008-2009
|
582
|
|
1993-1994
|
244
|
2019-2010
|
632
|
|
1994-1995
|
259
|
2010-2011
|
711
|
|
1995-1996
|
281
|
2011-2012
|
785
|
|
1996-1997
|
305
|
2012-2013
|
852
|
|
2013-2014
|
939
|
What is Property Acquisition Cost?
Property Acquisition Cost= Basic sale value + Improvement Cost + Stamp
Duty + Registration Cost + Legal fees + Advertisement Cost + Brokerage + Others
(Others: Any other cost involved in the process of acquisition of a specific property)
What is Indexed Cost?
Indexed Cost = Actual
Cost * Cost Inflation Index of the Year
of Sale/Cost Inflation Index of the Year of Purchase
Typical Example of Long Term Capital
Gain Tax Calculation
A purchased property in July 2008 for a basic sale value of INR 3000000.
He also paid in the process of acquiring the said property, Brokerage: INR
30000: Legal Fees: INR 15000: Registration and Stamp Duty: INR 200000. A spent
INR 100000 for improvement of the purchased property in September 2009.A sold
the property in January 2014 to B for INR 5500000. A paid brokerage INR 55000.
Acquisition Cost= 3000000+30000+15000+200000=3245000
CII value 2008-2009 = 582
CII value 2009=2010 =632
CII value 2013-2014 = 939
Indexed Cost of acquisition =
Actual Cost * Cost Inflation Index of the
Year of Sale/Cost Inflation Index of the Year of Purchase
=
3245000*939/582=5235489.4
Indexed Cost of Improvement =
Improvement Cost* CII of 2013-2014/CII of 2009-2010
= 100000-*939/632=148575.94
Calculation
of long term capital gain
(Sale value-brokerage)-(Indexed Cost of acquisition + Indexed cost of
Improvement)
(5500000-55000)-(5235489.4+148575.94)=609346.6
20% of 609346.6=12186.93 is the
amount to be paid by A as long term capital gain tax.
Long Term Capital Gain Exemptions
a) The
capital gains from the sale of a house if the taxpayer invests the gains in a
residential property within two years from the date of sale or constructs
another house within three years from the date of sale. One should not own more than one house,
besides the house one is investing in.
b)
Investment in Bonds issued by NHAI and REC with a maximum limit of INR 5000000
and a lock-in period of three years.
Capital Gain Account Scheme (CGAS)
If
a property has not been identified and purchased before the return has been
filed or before the due date for filing the tax return, whichever comes
earlier, the money has to be deposited in a special account known as the
Capital Gain Account Scheme (CGAS). Any withdrawal from CGAS should only
be for payments to be made in relation to the purchase of the new property.
Types of Capital gain Account Scheme
Savings deposit account: Suitable for people who are
planning to construct a house over a period of time with different
stages of withdrawals. The amount withdrawn should be used for housing purpose
only within 60 days from the withdrawal date.
Term deposit account: Suitable for for purchase of
house with one time payment. Amy withdrawal from this account in a
pre maturity period attracts penalty.
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