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How to calculate the indexed cost of property acquisition

To calculate LTCG from the property, the seller has to calculate the indexed cost of acquisition

The Central Board of Direct Taxes will soon declare cost inflation index (CII) numbers for the current financial year. If you plan to sell your property, calculate the indexed cost of property acquisition using the new number to arrive at the actual capital gain, and save on capital gains tax. Here’s how.

INDEXED COST OF ACQUISITION

Any gains arising out of property transfer attracts capital gains tax. If the property was held for less than three years before transfer by the seller, then gains from the transfer will be considered as short-term capital gains (STCG). This gets added to the seller’s other income(s) and taxed as per the income tax slab rate applicable. If the property was held for more than three years at the time of transfer, then the gains are considered as long-term capital gains (LTCG). It is taxed at 20% with indexation. To calculate LTCG from the property, the seller has to calculate the indexed cost of acquisition.

To arrive at this figure, use the CII for the year of purchase and sale. One can also take into consideration any major improvement made while owning the property, to calculate the total cost of acquisition. Money spent on improvement should also be adjusted against inflation.

Say, you bought a house in 2001-02 for 25 lakh, and then constructed another floor for 10 lakh, in 2005-06. Then, in 2013-14, you sold the house for 90 lakh. As the property was held for more than three years, it will be considered a long-term capital asset. So, you should first calculate the indexed cost of acquisition by applying CII on the cost of purchase, i.e., 25 lakh. You can find the CII values on www.incometaxindia.gov.in. In the example, CII is 426 and 939 for the years of purchase and sale, respectively. So, indexed cost of acquisition would be 55,10,563 [25,00,000 * (939/426)]. In the same way, adjust additional construction cost against inflation. CII for the year in which the new floor was added is 497. So, the indexed cost for this will be 18,89,336 [10,00,000 * (939/497)]. Hence, the total cost of property acquisition would 73,99,899 (55,10,563 + 18,89,336). Accordingly, your LTCG would be 16,00,101 (90,00,000 – 73,99,899). This is the amount on which LTCG tax will apply.

TAX DEDUCTION

You can avoid paying the tax by reinvesting the amount in a residential property within two years or constructing a property within three years from the date of property transfer. You can also invest in bonds notified under section 54EC of the income-tax Act up to 50 lakh.

If you are unable to reinvest the LTCG in a residential property or bonds before filing tax return for the financial year in which the transfer of property took place, the unutilized balance should be deposited into the Capital Gains Account Scheme before the due date of filing tax return. Doing so will help you remain eligible to claim the tax deduction. Also, if you want to claim deduction on the entire LTCG, you must reinvest the amount in one residential property in India.

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