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Save income tax during FY 2014-2015 on property gains
July, 10th 2014

It is really possible to save substantial amount of Income-tax on your long-term capital gains arising out of selling your immovable property if you take advantage of the Cost Inflation Index concept which, however, is applicable only in respect of long-term capital gains. Only when you hold your property for more than 36 months and then if you sell it the profit so derived is known as long-term capital gain which surely you can save by resorting to the theme of Cost Inflation Index.

The long term capital gains for all types of assets including long-term property gains for all assesses would be computed in the following manner:

1. Cost of acquisition of the asset whether movable or immovable is to be multiplied by the cost inflation index of that year in which the asset is transferred, and the resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired. If however, the asset was purchased before 1st April 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on 1st April 1981.

2. Any cost incurred on the improvement of an asset is to be similarly adjusted with the help of the cost inflation index, i.e. by multiplying the cost of improvement by the cost inflation index of the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the improvement to the asset was done.

The Government has notified the cost inflation index for various financial years from 1981-82 to 2014-2015, the table of cost inflation index for the different financial years is as under :-

Financial Year Cost Inflation Financial Year Cost Inflation

Index _ 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 2009-2010 632

1994-1995 259 2010-2011 711

1995-1996 281 2011-2012 785

1996-1997 305 2012-2013 852

2013-2014 939

2014-2015 1024

For the financial year 2014-2015 relevant to A.Y. 2015-2016 the net capital gain tax payable by an assessee in respect of long-term capital gains is calculated on the basis of the above cost inflation index. It may also be remembered that the benefit of cost inflation index is not available for short-term capital gains or losses. Thus, selling property (land, house, flat, etc.) within a period of less than three years from the date of its purchases is treated as a short-term capital gain or loss in respect of gain from property. Thus, the above cost inflation index will be of no use to a person deriving either a short-term capital gain or loss. So, too, the benefit of the cost inflation index is not available to non-resident Indians.

Apart from the adjustments arising from the cost inflation index the various expenses incurred on improvements to the asset, and on transfer of the asset for example stamp duty, legal fees payment of brokerage, etc. are deductible from the full value of the sale consideration. It is the net resultant figure which will be treated as a long-term capital gain or loss chargeable to income-tax in terms of Section 112 of the Income-tax Act.
For the A.Y. 2015-2016 the tax on long-term capital gains payable is 20% . thus, tax payment in respect of long-term capital gains is much lower than what has been prescribed by the Income-tax Act, if we take into account the impact of the cost inflation index. This is explained by the following illustrations :

Illustration No.1
Shyam purchased property for Rs.10,00,000 in the year 1981. He sold this in the financial year 2014-2015 for Rs.38,00,000. The long-term capital gain would be calculated as under :
Cost of acquisition for the purpose of capital gains
= { Cost of acquisition x Cost inflation index of the year of transfer}
÷ { Cost of inflation Index of the year in which purchased }
= { 10,00,000 X1024/100 Rs.1,02,40,000}
In this case, the selling price is lower than the cost of acquisition as computed with reference to the cost inflation index [ Rs.1,02,40,000]
Hence , there will be no capital gains tax payable, rather, there will be a long-term capital loss to the tune Rs. 64,40,000 which can be carried forward for adjustment against Shyam’s total long-term capital gains.

Illustration No.2
Anurag purchased flat for Rs.20 Lakhs during the financial year 1991-92 and sold it for Rs.1,40,00,000 Lakhs on 01-07-2014.
Normally, the capital gains should have been Rs.1,20,00,000 lakhs but in view of the adjustments on account of the cost inflation index, the capital gains would be calculated as under :
{ 20,00,000 x 1024/199 = Rs.1,02,91,457}
[Cost inflation index for 1991-92 = 199]
Thus, in this case, the long-term capital gains would be calculated as under :
Sale Price = Rs.1,40,00,000
Less : Adjusted cost price taking into = Rs.1,02,91,457
account the impact of cost inflation index
Long-term capital gains. = Rs.37,08,543

Illustration No.3
Neelam purchased a piece of land during the financial year 1989-90 for Rs. 6 lakh. She sold it for Rs.40 lakh in Financial Year 2014-2015 (A.Y : 2015-2016). Normally, the capital gains would have been Rs.36 lakh but in view of cost inflation index, the capital gains would be calculated in the following manner :
6,00,000 X 1024 (cost inflation index for 2014-2015)
172 (Cost inflation index for 1989-90)
= Rs. 35,72,093

The long-term capital gains as a result of cost inflation index adjustment would be as under :

Sale Price = Rs. 40,00,000
Less : Adjusted cost price as per = Rs. 35,72,053
Cost Inflation Index ______________
Long-term capital gain = Rs. 4,27,907

Illustration No.4 :

Pranab Kumar purchased property on 1st February, 2014 and sold the same on 15-6-2014. The cost price was Rs.22 lakh and the sale price Rs.26 lakh, thus the profit is Rs.4 lakh .

As this is a short-term capital gain, the benefit of cost inflation index is not available and Mr. Kumar is liable to pay tax at the normal rate.

As shown by the above calculations and illustrations, in most cases the assessee will benefit to a very large extent as a result of cost inflation index.

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