House Property is generally the biggest asset one has and when selling your old house you are liable to a hefty amount of capital gains tax. In this article we are going to discuss about how to calculate your capital gains tax liability according to the income tax laws prevailing in India and how to save capital gains tax taking advantage of the various exemptions and benefits available.
Knowing your Period of Holding
The first step towards calculating the tax liability is to know whether your asset is long term or short term. If your period of holding is more than 3 years then you owe long term capital gains tax on them otherwise it is short term.
Computing the indexed cost of acquisition when period of holding is long term
House property is generally held for a long period of time and thus we are entitled to get the benefit of indexation. Indexation is done to counter the effect of inflation. India is a growing economy and prices have been on a steady rise ever since and the purchasing power of money is decreasing. This basically means that things that say, Rs 100 could fetch us in the 1980’s or 1990’s was much more than what it can fetch us today. With the same logic, the value of this amount of money that we paid for buying this house is not the same today in terms of purchasing power and needs to be adjusted. This is done by using the following formula:
Indexed COA = COA × Cost Inflation Index for the year of sale
Cost Inflation Index for the year of purchase
If the property is purchased before 1981-82 then higher of original cost or Fair Market Value as on 1/4/1981 shall be indexed using CII of 1981-82 as base year (denominator) and considered as Indexed COA.
The cost inflation index (CII) for all the financial years from 1981-82 to the current year is given below:
|
Financial Year |
CII | Financial Year | CII |
| 1981-82 | 100 | 2000-01 | 406 |
| 1982-83 | 109 | 2001-02 | 426 |
| 1983-84 | 116 | 2002-03 | 447 |
| 1984-85 | 125 | 2003-04 | 463 |
| 1985-86 | 133 | 2004-05 | 480 |
| 1986-87 | 140 | 2005-06 | 497 |
| 1987-88 | 150 | 2006-07 | 519 |
| 1988-89 | 161 | 2007-08 | 551 |
| 1989-90 | 172 | 2008-09 | 582 |
| 1990-91 | 182 | 2009-10 | 632 |
| 1991-92 | 199 | 2010-11 | 711 |
| 1992-93 | 223 | 2011-12 | 785 |
| 1993-94 | 244 | 2012-13 | 852 |
| 1994-95 | 259 | 2013-14 | 939 |
| 1995-96 | 281 | 2014-15 | 1024 |
| 1996-97 | 305 | 2015-16 | 1081 |
| 1997-98 | 331 | ||
| 1998-99 | 351 | ||
| 1999-00 | 389 |
Alternatively you can also get it from the following link of the official website of the income tax department –
http://www.incometaxindia.gov.in/Pages/utilities/Cost-Inflation-Index.aspx
Computing the indexed cost of improvements when period of holding is long term
Since the initial purchase of the house, up to the ultimate sale if you have incurred any costs on improvements that are capital expenditure in nature i.e. they have added to the value of the house, then that is allowed as deduction too. Note that mere repairs that are generally done for the upkeep of the property are not allowable. Indexed cost of improvements are calculated using the formula:
Indexed Cost of Improvements = COI × CII for the year of sale
CII for the year of improvement
The CII is the same as that given in the table above. The following points should be noted while calculating Indexed cost of improvements.
⇒ If there are more than one improvements in the period of holding then, Indexed Cost of Improvement is calculated separately for each of the improvements based on their respective years of improvement.
⇒ If the property is improved before 1/4/1981 then such improvements are ignored.
Calculation of Long term capital gains tax on house sold
Full Value of Consideration (Sale Price) XXX
Less: Indexed Cost of Acquisition (XXX)
Less: Indexed Cost of Improvement (XXX)
Less: Expenditure incurred wholly and exclusively (XXX)
in connection with sale (example : brokerage) ______
Gross Long Term Capital Gains XXX
Less: Exemption under section 54/54EC (later in this article) (XXX)
Taxable Long Term Capital Gains XXX
Rate of Taxation for Long Term Capital Gains is 20% with the benefit of indexation.
Exemptions to Long Term Capital Gains Tax under section 54 and 54 EC
Section 54
Whom is it applicable to?
This exemption is available to individuals and HUF’s (Hindu Undivided Family) on Long term capital gains arising due to sale of residential house.
When is it applicable?
If the assessee (tax payer) buys another residential house within a period of one year before or two years after OR constructs another residential house within the period of three years after the sale of the first house property discussed above.
What is the quantum of benefit?
The cost of the new house purchased or constructed is deducted from the long term capital gains incurred in selling the first house till the extent of the gains.
Are there any restrictions on sale of new house u/s 54?
Yes, the new house cannot be sold before three years. If this is breached and the new house is sold before three years then you don’t get any deduction for cost of acquisition (COA) while computing capital gains in the sale of this new house (i.e. COA of new house is considered zero).
What if the amount you claim for exemption to buy/construct new house is not completely utilized for that purpose before date of filing returns?
The unutilized amount can be deposited to any Nationalized Bank under the Capital Gains Deposit A/C scheme until it is utilized. If after three years are completed and the money is still not utilized for buying/constructing the new house then, the unutilized amount is chargeable to capital gains in that year.
Section 54 EC
Whom is it applicable to?
This exemption is available to all assessees on Long term capital gains on all assets.
When is it applicable?
If the assessee invests in long term specified asset within six months of sale of the house property discussed above, then he gets exemption in long term capital gains on that house up to the extent of his investment in the specified asset subject to a maximum of Rs 50,00,000 during any financial year.
What are specified assets under section 54 EC?
Long term specified asset under this section means any bond redeemable after three years and is issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited.
Are there any restrictions on sale of specified asset under section 54 EC?
Yes, the specified asset cannot be sold before three years. If this is breached and the specified asset is sold before three years then the cost of such specified asset shall be deemed to be the income chargeable as long term capital gains in the financial year in which the specified asset is sold.
Can exemption under section 54 EC be claimed along with exemption under section 54?
Yes, you can claim benefit of both sections together to save your capital gains on sale of a long term house property. Section 54 EC does not specify any order of priority when exemption is also available under any other section. Thus if section 54 is also applicable then assessee can first claim exemption under section 54 and then under 54 EC for the remaining amount of capital gains.
Period of Holding and Indexed Cost of Acquisition or Improvements when the house was initially gifted to you or transferred to you without adequate consideration
While calculating the period of holding one should keep in mind that if the house was gifted or transferred for inadequate consideration to them then the period of holding of the previous owner is also included in your period of holding.
For example, if Mr. X held a property for 10 years and then gifted it to Mr. Y and after holding it for 2 years Mr. Y is selling the property now then the period of holding for Mr. Y would be 10 + 2 = 12 years and it will be liable to long term capital gains tax. This is mainly because when the previous owner, i.e. Mr. X in this case, gifted the property he didn’t pay any taxes as he didn’t actually sell it and when Mr. Y actually sells it he gets the benefit of increase in the value of property ever since Mr. X had acquired it.
Similarly, the cost of acquisition and its indexation is also done according to the cost to the previous owner and his year of acquisition respectively. This can clearly be understood looking at the diagram below:
Calculation of capital gains tax on house property if period of holding is short term
Full Value of Consideration (Sale Price) XXX
Less: Cost of Acquisition (No Indexation) (XXX)
Less: Cost of Improvement (No Indexation) (XXX)
Less: Expenditure incurred wholly or exclusively (XXX)
in connection with sale (example : brokerage) _____
Short Term Capital Gains XXX
Rate of Taxation for Short Term Capital Gains is as per your tax slab.
FYI – Sellers need Form 16B from buyers regarding TDS deducted on sale of the house
Buyers are supposed to deduct 1% of the sale consideration as TDS (Tax Deducted at Source) while buying house where the consideration exceeds Rs 50,00,000. This is applicable since 1st June 2013 to curb people from evading tax or under reporting. The buyer of the property does not need to apply for a TAN number for doing so. The buyer simply has to deposit this TDS within seven days from the end of the month in which transaction took place in the stipulated manner filling form 26QB. The buyer will also need to issue the seller form 16B in respect of the TDS deducted.
For more information and to download the relevant forms click on the link given below:
http://www.incometaxindia.gov.in/Pages/tds-sale-of-immovable-property.aspx
Note : The tax rules mentioned have been updated in this article and are pertaining to PY 2016-2017
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