211. How to calculate capital gains on property sold in India - Saving on capital gains
Question: I am a resident in Australia of Indian origin. I had bought a property in India in 1995 and now am planning to sell it. The purchase price of the flat was Indian Rupees 35 lakh. My uncle in India has an offer from someone to buy my flat now for Rupees 105 lakh.The buyer wants me to accept part of the money in cash as he says it will save me money because I would be paying big capital gains if payment is made by bank transaction.The cash part from what I understand would be about 45 lakh. Since I bought the property for 35 lakh then I would be paying capital gains on only 10 lakh compared to a 70 lakh capital gain!!!Will appreciate any comments or suggestions on this as to what is the best way to proceed. I need to send a power of attorney to my uncle soon so a speedy response would be most appreciated.Kind RegardsR. SinghAnswer: Your method of calculating capital gains is not the way to calculate taxable capital gains in India. The advise you are getting is in my opinion not correct. Let me try and explain in simple terms.There are two types of capital gains in India for taxation purposes, short term and long term. Since you have held the property for quite some time now the capital gain for you would classify as a long term capital gain. So let me briefly try to describe how your capital gain can be calculated to minimize the tax payable on the sale of your property.Sale of a house usually results in long term capital gains. Many Nri’s who end up selling properties they own in India are led to believe that they need to pay 20% as capital gains tax in India. This can in today’s high priced real estate market add up to a hefty amount and some Nri’s are steered into accepting black money which they are led to believe will save them capital gains tax.Accepting black money can in reality lead to problems for the seller and might not even save you tax in the long run.Capital gains on the sale of property may actually be a lot lower than what some may lead you to believe.Calculating Capital GainsSuppose you bought a house in India for Rupees 10 lakh in 1990 and in the year 2010 the property has appreciated and you are offered Rupees 90 Lakh to sell the property.The purchaser wants to pay you 50 lakh in cash and register the property sale for Rupees 40 lakh. He says you will save capital gains tax and he will save on the registration fee. Seems like everyone is doing this these days in India and being nonresident in India you may think this is the easiest way to proceed.Actually the calculation above is not correct. While deducting the purchase price of 10 Lakh from the sale price of 90 Lakh gives you a profit of 80 Lakh. For tax purposes your capital gain is NOT 90 Lakh because of cost inflation indexation can reduce your liability considerably.One acceptable fact about money these days is that the value of the money decreases every year due to inflation. The department of income tax of India thankfully, has a provision that allows the indexing the cost price so as to arrive at a price that is comparable to the sale price when you sell your property. This price is referred to as the Indexed Cost of Acquisition
How to calculate Long term capital gains liability
The cost of acquisition of property bought many years back can be indexed using the cost inflation index numbers. The cost inflation index is a number derived for each financial year by the Reserve Bank of India taking into account the prevailing prices during that financial year.Hence, if we see a change in the cost inflation index between the year 1995 and 2013, it would give us an indication of the change in prices between these years. To start off, first you need to find the Indexation factor from the cost indexing inflation table. A sample of this table for the year 1981 to 2014 is provided HEREFrom the table you take the cost inflation index for the year you are going to sell your property and divide it by the cost inflation index of the year you purchased the property. This is the method to find the indexation factor that would apply to you.Formula:Indexation Factor = Cost inflation index of the year of sale / Cost inflation index of the year of purchase.Lets apply this to your current situation. You bought your property in 1995 for 35 lakh and are planning to sell it in 2010 for 105 lakh.So lets check the 'Cost Inflation Indexing Table' by clicking HERE1. You will notice that cost inflation index for the year 2010 when you want to sell is 711 2. The cost inflation index of the year 1995 when you purchased the property is 281So using the formula shown above:Indexation Factor = 711 / 281 = 2.53024This means that the prices have increased around 2.5 times between the years 1995 and 2010Once you have calculated the indexation factor, you can calculate the indexed cost of your acquisition. This is done by multiplying the actual sale price by the indexation factor.Formula: Indexed Cost of Acquisition = Actual Purchase Price * Indexation FactorSo your Indexed cost of acquisition when applying this formula works out to 35 lakh * 2.53024 = 88.56 lakh.Calculating your long term capital gainLong term capital gain is the difference between the sale price and the indexed cost of your acquisition.Formula: Long Term Capital Gain = Sale Price - Indexed Cost of AcquisitionUsing the amounts from our example:Long Term Capital Gain = Rs. 105 Lakh – Rs. 88.56 Lakh = Rs. 16.44 Lakh.So the capital gains that you originally calculated at a whopping Rs 70 lakh is actually Rs 16.44 lakh. This can even be further reduced when you add all the expenses for your flat for maintenance etc and apply indexing to those figures also.Suppose your final figure is trimmed down to a capital gain of 10 lakh, you will considering a 20% capital gains tax rate pay just 2 lakh.Consider the following:•By accepting cash money, which will in most probability be black money, you will be stuck with a large amount of cash that you will not be able to deposit in a legal bank account as the source of the money would be questionable.•You will not be able to repatriate this money legally. If you receive the money from the sale of your property legally, pay the right taxes then you clear the way to transfer your money abroad. India has no shortage of foreign exchange now and money you have legally in bank accounts can be repatriated legally with minimum paper work. Check with your bank in India. Step by step repatriation of the sale of property proceeds by non-residents is explained in my book THE NRI GUIDE 2012/2013 on page 172.
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