The calculation of capital gain is very simple. It is just the profit on sale of your property. It means you have to just subtract the cost of the property from the sale price of property.
Capital gains = Sale price of the property – Cost of the property
But the use of inflation index changes the cost of the property. To get the cost of property after using the indexation, the following formula is used.
Indexed cost of property = Cost of the property x (cost inflation index of the year when property is sold /cost inflation index of year when property was bought )
Hence, actual capital gains would be as following.
Capital gains after indexation = Sale price of the property – Indexed cost of the property
Shyam buys a house of for 30 lakh in May’ 2009, after 4 years he sells it for 45 lakh. What would be his capital gain ?
To get the real capital gains we have to use the indexed cost of acquisition. To calculate the indexed cost if acquisition we need capital gains index of 2009 and 2013. You can get this data from the cost inflation index table.
Cost inflation index of 2009-10 = 632
Cost inflation index of 2013-14 = 939
The indexed cost of property = (939/632) x 30,00,000 = 1.486 x 30,00,000
The indexed cost of property = 44,57,278
Capital gains = 45,00,000 – 44,57,278 = 42,722
Hence, the capital gains is Rs 42,722 instead of Rs 15 lakh. The capital gains tax on 15,00,000 would have been 3 lakh (15,00,000 x 20%) but because of cost inflation index it has become only Rs 8,544.
You can also take the benefit of indexation on cost of improvement of property. It will reduce your tax liability.
There are below exemptions related to purchase of new residential house property in order to save tax on long term capital gains.
Investing capital gains from sale of residential house (Section 54)
If an individual or HUF earns capital gains on sale of a residential house and invests the amount of capital gains to buy or construct a new residential property, the capital gain will be exempt from tax.
- New residential property must be purchased either 1 year before the sale or 2 years after the sale of the property. In case of construction, the new residential property must be constructed within 3 years after the sale of the property.
- To avail the full exemption, entire capital gains have to be invested in a new property.
- In case, entire capital gains are not invested, the amount not invested is chargeable to tax as long term capital gains.
- The amount must be invested in purchasing or constructing only ONE house property. The house property must exist in India.
Investing capital gains from sale of capital asset other than house property (Section 54F)
You can also save capital gains tax if the sold property is not a residential property. Under section 54F, the capital gains is exempted if sale proceeds of non residential property is invested in a residential property.
The same exceptions as those under Section 54 are applicable to Section 54F
Exemption under Section 54EC:
Under Section 54EC, you do not have to pay LTCG tax on sale of any long-term capital, if the amount received as capital gains is invested to buy specific notified government bonds and securities. The bonds should be bought within 6 months of the sale of the asset. The maximum amount you can invest in this way is Rs. 50 lakh with lock in period of 5 years.
Deposit in Capital Gain Deposit Account Scheme:
Capital Gain Deposit Account (CGDA) Scheme, 1988, is complementary to Section 54 and Section 54F. If you are unable to utilise the entire capital gains made in a transaction till the date of filing Income Tax Return, then you can deposit the unutilised amount under the CGDA Scheme in any public sector bank. Once the money is deposited in this account, you need to use it within 2 years (in case of purchase of a new house) or 3 years (in case you are constructing a new house).
You have to open the account before the deadline to file I-T return, and the money must be used only to buy a residential property. If the money is not utilised in buying a house within the time limit, the capital gains will be subject to tax.
Sale of a long-term capital often gets you high profits because of the increasing inflation and cost every year. If you invest the profits well, you can save yourself 20% of the amount which otherwise would go to the government as tax.
-There is no special rebate for NRI.
If you need any further assistance,please let me know.