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.
Answer: 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
Calculating Capital Gains
Suppose 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
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 HERE
From 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.
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
So lets check the 'Cost Inflation Indexing Table' by clicking HERE
1. You will notice that cost inflation index for the year 2010 when you want to sell is
2. The cost inflation index of the year 1995 when you purchased the property is 281
So using the formula shown above:
Indexation Factor = 711 / 281 = 2.53024
This means that the prices have increased around 2.5 times between the years 1995
Once 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
Formula: Indexed Cost of Acquisition = Actual Purchase Price * Indexation Factor
So your Indexed cost of acquisition when applying this formula works out to 35 lakh * 2.53024 = 88.56 lakh.
Calculating your long term capital gain
Long 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 Acquisition
Using 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
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
Informing educating and connecting Indians across the globe . . . by Virendar Chand
Disclaimer: Information provided is for general knowledge only and should not be deemed to be professional advice. For professional advice kindly consult a professional
accountant, immigration advisor or the Indian consulate. Rules and regulations do change from time to time. Please note that in case of any variation between what has
been stated on this website and the relevant Act, Rules, Regulations, Policy Statements etc. the latter shall prevail.
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