The
residential flat or apartment sale has direct implication on your computation
of taxable income. The property in this context is an immovable property which
is exclusively used for residential purpose.
The
residential property purchased may be
sold with in three years or after three years. If the sale affected within 3
years it is considered as short term capital gain and the sale proceeds are
added to the income and taxed at the applicable tax rates of the assesse. , on other hand, residential flat or an
apartment sold after three years from its purchase, it is considered as Long
Term Capital Gain( LTCG) and taxed at 20% with indexation benefit.
The
residential property sold after three years enjoys all the benefits of
Indexation. The indexation considers the inflation effects on erosion of real
value of money through rise in prices. Due to this your investment has risen
three to four times, the purchasing power of money will have gone down 50%,
from the time you made investment. To reduce the impact of inflation on your
investment, indexation benefit is provided in calculating long term capital
gains. Through this benefit you can adjust your capital gains from inflation by
applying an appropriate factor from cost inflation index to the original units.
Her is an example how
Indexation Benefits works :
Cost of purchasing a
property in 2007 35,00,000
= 00
Cost of selling the
property in 2012 50,00,000
= 00
Inflation Index 2007 - 551
2011
- 785
Indexed Purchase
cost - 35,00,000 * 785 / 551 = 49,86,388 = 00
Long
Term Capital Gains = 50,00,000 - 49,86,388 = 13,612 = 00
Tax on LTCG
= 13,612 * 20% = 2,722 = 00
Education Cess = 2722 *3% =82
+ 2722 = 2,804 = 00
If inflation index had
not been considered the non indexed gain would have been Rs. 15,00,000
Thus the indexation
benefit substantially reduces the tax liability of an assesse, otherwise would
have been a huge tax liability resulted out of above example.
In a nut shell
Long Term Capital Gain
is computed as below:
LTCG = Full value of
consideration received or accruing - (indexed cost of acquisition + indexed
cost of
improvement + cost of
transfer)
Where, Indexed cost of
acquisition =Cost of acquisition x CII of year of transfer /CII of year of
acquisition
Indexed cost of
improvement =Cost of improvement x CII of year of transfer /CII of year of improvement
CII = Cost Inflation
Index (Please see chart given below)
Tax liability on LTCG to
be taken at 20%.
If total income other
than LTCG is less than zero slab,LTCG over the zero slab only attracts tax at
20%.
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