Anything and everything that is sold in this country bring tax implications and property is no different. Infact, long term capital gains tax on property or LTCG on property is something that must be area of consideration while planning to sell property.
Capital gain is one of the heads prescribed under Indian income tax act, 1961 specifies taxation laws to tax gain on sale of capital asset. When a property is sold within one year it is subject to Short Term Capital Gain (STCG) and when sold after one year, it is chargeable under Long Term Capital Gains Tax in India (LTCG)
Long term capital gain tax rate is 20.6% of the profit after indexation of cost. Indexation of cost basically refers to a facility that a taxpayer can use to inflation-adjust the cost. In other words, indexation factors in inflation during the holding period by adjusting the cost of acquisition upwards thereby bringing down the tax liability of the investor
Let’s understand with the help of LTCG example –
Property was bought in the FY 2005-06 for Rs 1 crore. The same is being sold in 2008-09 for Rs2 crore. A simple arithmetic subtraction would result in a long term capital gain of Rs 1 crore.
Now, this property has to be adjusted to inflation index to arrive at the correct capital gain.
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The CII for FY 2005-06 as declared is 497 and for 2008-09, it is 582. If the cost is adjusted with the ratio, the revised cost would work out to be Rs. 1.17 crores, thereby bringing the capital gain amount down to Rs 89.87 lacs.
This Rs. 89.87 is now chargeable to tax @ 20.6 % (effective rate) for the purpose of computing capital gain on sale of this property.
Clearly it is evident that inflation adjustment helps us to save tax by increasing our cost of acquisition of property. But why do we adjust it for Inflation?
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Answer -The value of the rupee say 10 years ago wasn’t the same as the value currently – essentially on account of inflation. What was worth Rs 100, ten years ago will not be worth the same now. So if you are asked to pay tax on your profits derived out of a simple arithmetic of reducing actual cost from the sale proceeds, it would be unfair. Simply because the sale proceeds are derived out of the current value of the rupee, whereas the cost you paid was based on the value of the rupee as existed 10 years ago in this case.
How to save Long Term Capital Gains Tax (LTCG) in India
Section 54 under Indian Income Tax Act, 1961 gives us ways to save capital gain subject to fulfilment of certain conditions. Capital Gain under section 54 can be used to save up to the amount used for buying or constructing new house. If the amount of capital gain is greater than the amount buying a new house, the remaining amount of capital gain will be taxed.
CAPITAL GAIN>NEW HOUSE COST, then taxable amount shall be capital gain minus the cost of new house.
If the new house purchased or construct will be sold within three years from the date of purchase, the calculation of capital gain under section 54 is as under
- Cost of new house < Capital gain, of new house = Nil
- Cost of new house > Capital Gain, value of new house = Purchase or construction minus capital gain