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Saturday, January 11, 2014

Capital Gain in Property Sale

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?
capital gain is a profit that results from a selling of stockbond 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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