Calculating capital gains on

sale of property in India

When it comes to capital gains on real-estate, some people believe that the selling price, minus the purchase price is their profit, and the amount on which they would be subjected to capital gains tax. For example: Suppose you bought a house in India for Rupees 35 lakh in November 1995 and you sell this property in October 2010 for a price of say Rupees105 lakh. Some people may assume that the capital gain on the sale of this property would be 105 lakh (selling price - purchase price). This works out to a 70 lakh. Actually the calculation above is not correct. While deducting the purchase price of 35 Lakh, from the sale price of 105 Lakh, gives you a profit of 70 Lakh, this is not your capital gain. This is because when you factor in the cost inflation indexation, your taxable capital gain liability is reduced considerably. What is Cost Inflation Indexing 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 in India allows 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 on sale of property

The cost of acquisition of property that was purchased many years ago can be indexed, using the cost inflation index numbers. Cost inflation index, is a number derived for each financial year, by the Reserve Bank of India. This is done by 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 2010, 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. The cost of inflation index table is provided on this website and you can see it by clicking HERE Formula to find the indexation factor: Indexation Factor = Cost inflation index of the year of sale / Cost inflation index of the year of purchase. Example: Suppose you purchased a house in November 1995 for Rupees 35 lakh and decide to sell it for Rupees 105 lakh in October 2010. Let's calculate the capital gains on such a transaction by applying the cost inflation index. 1. First we need to find the cost inflation index for the year of the sale. Using the cost inflation index chart table provided, we can see that the cost inflation index for the year 2010 when you want to sell is 711 2. The cost inflation index for the year 1995, when you purchased the property is 281. So using the formula, Indexation Factor = Cost inflation index of the year of sale / Cost inflation index of the year of purchase: Indexation Factor = 711 / 281 = 2.53024 This means that the prices have increased around 2.5 times between the years 1995 and 2010. To clarify further, what you bought for 35 lakh in 1995 would cost 2.5 times more in 2010 due to inflation reducing the value of money. 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 factor. Formula: Indexed Cost of Acquisition = Actual Purchase Price * multiplied by the Indexation Factor. So your Indexed cost of acquisition when applying this formula works out to 35 lakh * 2.53024 = 88.56 lakh. The actual capital gains that would apply for your property sale can now be calculated. 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 = Rupees 105 Lakh - Rupees 88.56 Lakh = Rupees 16.44 Lakh. So the capital gain that seemed to be Rs. 70 lakh is actually only Rupees 16.44 lakh. This can even be further reduced, when you add all the expenses for your property upgrades, maintenance etc. and apply indexing to those figures also. Suppose Rupees 6.44 lakh was spent in making improvements to the property after you bought it in 1995. Then your final figure is trimmed down to a capital gain of 10 lakh. Considering a 20% capital gains tax rate, you would have to pay just 2 lakh. Cost inflation index for prior years: The benefit of indexation can be availed, either from the year of acquisition of the property by the assesse, or from the base year 1981-82, whichever is later. The financial year in India is from April to March. When reading the cost inflation index chart, the month of purchase needs to be taken into consideration. The latest cost of inflation index chart is available on the previous page. Update Capital Gains Tax Changes - Budget 2017-2018 1. Assets held for less than two years will now be considered to be short term. [Previously it was less than three years] 2. Change of base year for Cost Inflation Index. Base year now is April 1, 2001. 3. Click HERE for new chart

Full Cost Inflation Index Chart

To see the latest Cost Inflation Index