When you are selling you property, you are liable to pay tax on the gain earned on the sale of the property. Therefore it is important that you know if you are earning a short term capital gain or a long term gain and the tax rate that is being charged on it. It is crucial that you know what the short term and long term capital gain is.
Short Term Capital Gain:
Gain that arises from transfer of a capital asset that the taxpayer has held for a period not more than months. For instance Mr. Sam sold his property in January, 2016, which he had purchased in May, 2014. The capital gain on the sale is Rs.8,40,000. This will be treated as short term capital gain as he held the property for less than 36 months.
Long Term Capital Gain:
Gain that arises from the asset that has been transferred, which the taxpayer held for more than 36 months. For instance, Mr. Sam sold the property at Rs.8,40,000 capital gain in January, 2016. The property was purchased in May, 2000. The gain will be treated as a long term capital gain as he had held the property for more than 36 months.
Capital Gain Calculation on Sale of Property:
If you have brought a property for Rs.35 lakh and sold it after a certain period for Rs.105 lakh, your profit is Rs.70 lakh. But that profit is not the capital gain. You have to consider the cost inflation indexation and that considerably reduces your capital gain liability.
Cost Inflation Indexation:
It allows you to index the cost price to arrive at a comparable sale price. The cost inflation index number are used to index your capital gain. Reserve Bank of India derives a number each financial year and it takes into account the prevailing prices for the particular financial year.
The cost inflation index (CII) chart is as follows:
| Year | CII | 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 | 519 |
| 1987 – 88 | 150 | 2006 – 07 | 497 |
| 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 | 2016 – 17 | TBA |
| 1998 – 99 | 351 | – | – |
| 1999 – 2000 | 389 | – | – |
Indexation Factor is the CII of the year of the sale divided by the CII of the year of purchase.
For example, where Mr. Sam sold his property in January, 2016 which he had purchased in May, 2014 for Rs.30 lakh. The capital gain will be treated as short term capital gain as he held the property for less than 36 months. His indexation factor will be 1081/ 939 = 1.15. This means that the prices of the property has increased 1.15 times since the purchase.
If the property was purchased in May 2000, the indexation factor will be 1081/ 406 = 2.66. The price of the property has increases 2.66 times from the time of purchase. The property you got Rs.30 lakh cost you 2.66 times in 2016 due to inflation and the reducing value of the money.
After you have determined the indexation factor, you have to calculate the indexed cost of acquisition which is the actual purchase price multiplied by the indexation factor. In this case, if you have purchased the property in 2000, the indexed cost of acquisition is Rs.30 lakh multiplied by 2.66 which is Rs.79,80,000.
If you purchased the property in 2014, the indexed cost of acquisition is Rs.30 lakh multiplied by 1.15 which is Rs.34,50,000.
Long term capital gain is the difference between the indexed cost of acquisition and the sale price.
If the property was brought in the year 2000, the gain on the sale will be considered as a long term capital gain. The long term capital gain is Rs.49,80,000 (Rs.79,80,000- Rs.30 lakh).
The capital gain can be further reduced by adding your expenses for property upgrades, expenses of transfer and maintenance. Assuming that you have spent an additional Rs.10 lakh on the maintenance to your property, then your long term capital gain will be Rs.39,80,000 (Rs.49,80,000 – Rs.10 lakh). The capital gain tax is charged at 20% with indexation. So the tax you have to pay is Rs.7,96,000.
The short term capital gain is the difference between the cost price and the sale price of the property. You can also add the maintenance and property upgrade charges to reduce your short term capital gain. The tax you have to pay is as per the income tax slab rate that you fall under. The tax rates are different for the different categories. The different categories are:
- Male individuals below 60 years and HUF
- Female individuals below 60 years
- Senior citizens above 60 years
- Super senior citizens above 80 years
- Co-operative society
- Domestic company, firms and local authority
You must always index your cost of the property as it reduces your capital gain by a lot and you will end up paying less tax towards the capital gain.
Tax Deduction:
You can avoid paying the tax if you are reinvesting the amount in another residential property within 2 years or 3 years if it is being constructed from the date of transfer of the property. You can also invest in bonds as notified under Section 54EC of the Income Tax Act. Up to Rs.50 lakhs can be invested in these bonds. If the gain is not utilised to buy another property or to invest in bonds, then it must be deposited in the Capital Gains Account scheme before filing your returns. This will help you claim tax deduction.