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Capital Gains tax on sale of Immovable Properties and exemptions available thereon

CA Pradeep Narain

1. The following is a brief on capital gains tax arising on sale of property and exemptions available. Surplus arising from sale of immovable property shall be chargeable to tax as income under the head Capital Gains. Immovable property includes plot, residential house, commercial property and also agricultural land in some cases.  Exemption from tax can be claimed if stipulated investments are made and held for the minimum required period.

   Capital Gain or surplus from such sale is the difference between the full consideration of the property sold, reduced by its indexed cost of acquisition and improvement. The indexed of acquisition can be arrived at by applying a cost inflation index with reference to the Table 1 given below. The property should not have held as inventory in a business of to avail the exemption under capital gains 

 2.  Long term and short term capital Gains
Capital Gains may be Short-term or Long-term, depending upon the period of holding of the asset.
 A Short term Capital gain arises on the sale of property, not held for more than 36 months before the date of its sale. Long term Capital gain arises on transfer of property, held for more than 36 months before the date of its sale.
It is important to note that indexed costs of acquisition and improvement can be arrived at for long-term capital gains only and not for short-term. Also tax rates are different for each type of gain.

Rate of Tax:

  • Long term Capital Gains are taxed @ 20% + cess @3% [education and higher education cess].

b)   Short term Capital Gains are taxed at the normal slab rates + cess.

3.   Indexation of cost of acquisition and cost of improvements:

  • As stated earlier, Cost of acquisition and costs of improvement is to be arrived at by applying a cost inflation index in case of long-term capital gains. Cost Inflation Index table is given below:                      

Financial year

Cost inflation index

Financial year

Cost inflation index

Financial year

Cost inflation index

1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
   1990-91
   1991-92

100
109
116
125
133
140
150
161
172
    182
    199

1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
.2002-03

223
244
259
281
305
331
351
389
406
426
447

2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14

463
480
497
519
551
582
632
711
785
852
-

     
 4.  Illustration:
 A person sells a property in the financial year 2011-12 for Rs. 100,00,000/-, acquired by him in June 1981 for Rs. 15,00,000/-. He has no other income.
  The indexed cost of acquisition in this case would be Rs 35,55,000 [711/100*Rs. 5, 00,000/- = Rs. 35,55,000/-]. Capital Gain is Rs 64,45,000/- Rs. [100,00,000 - 35,55,000] and  total tax payable is Rs. 13,27,670/-.
                        

  Calculation of Capital gains Tax

S.No

Particulars

Amount [Rs.]

 

  1.

Sale of property in financial year 2010-11

  100,00,000

  2.

Purchased in June, 1981

     5,00,000

 

  3.

Indexed cost of acquisition   [Rs. 5, 00,000*711/100]

    35,55,000

 

  4.

Capital Gains
    Sno. [1- 3]

    64,45,000

 

  5.

Tax payable @ 20% of Rs.
 64,45,000/- [basic threshold income limit not applicable to NRIs on capital gains]

   12,89,000

  7.

Cess @ 3% on Tax

       38,670

  8.

Tax + Cess

    13,27,670

  Notes:

  • Had the property in this case been purchased in financial year 1983-84, the indexed cost of acquisition would have been Rs.30, 64,655/-. [711/116 * Rs. 5,00,000/-].
  • Advance tax is to be paid in time, to avoid interest payments.
  •  Brokerage/transfer expenses can be claimed as a deduction from capital gain.
  • Tax Planning:

 Investments can be made to claim exemption from capital gains tax in this case. These are discussed below.

    Investments to claim exemption from Capital gains tax on sale of properties:

    It is possible to claim exemption from capital gains tax, on sale of properties such as agricultural land, plots, house, shares etc. if prescribed investments are made within a stipulated time. Investments can be made in the following assets and have to be held for a stipulated period.

  • Investment in agricultural land [on Short term / Long term capital gains] on sale of       agricultural Land. [Sec. 54 B]
  • Investment in a residential house on sale of a residential house. [Sec.54]
  • Investment in residential House on sale of ANY property including plots. [Sec. 54 F]            

       d)   Investment in certain Bonds. [Sec.54 EC]; Bonds issued by the National Highways      Authority of India or by the Rural Electrification Corporation Ltd. 

  Please note that the Quantum of investment to be made for claiming exemption is either capital gains or the entire consideration received, depending upon the type of property sold.   

  •       A bird’s eye view of the investments to be made for tax exemptions     

 

Sno

 

Sec.

Who can avail?

Type of asset sold

New Asset where investment can be made

Type     of gain

Quantum to be invested in new asset to claim exemption

Time limit to acquire the new asset,

 

 1.

 

 54B

 

Individual

 

Agricultural land

 

Agricultural land

 

Short- term/
Long-term

 

Amount of
Capital gain to be invested

 

 Within 2 years of sale

 
 
 
2.

 
 
 
54

 

 

Individual
or HUF

 

 

Residential House

 

 

Residential House

 

 

Long- term

 

 

-do-

1) To   purchase a house, either one year before or two years after the sale of original asset

2) To construct a house within three   years after the sale of original asset
.

 

3.

 

 54F

 

Individual
or HUF

 

Any long- term capital asset

 

Residential    House

 

Long- term

 

Full value of
consideration to be invested

 

Same as above 
[In this case, it is
applicable, if you own more than one more house at the time of sale]

 

4.

 

54EC

 

Any person

 

Any long- term capital asset

 

Bonds as per 6(d) above

 

Long- term

 

Amount of
Capital gain to be invested

 

Within 6 months of sale [maximum Rs  50  lakhs in a financial  year]

 

 
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