Mr. Mehta bought a house worth Rs 10 lakh (10,00,000) in Financial Year 2007-08. He sells the house in Jul 2012-13 for Rs 15 lakh( 15,00,000) . Under the Indian Income Tax Act profit/loss sale of asset such as bonds, shares, mutual fund units, property come under the category of Capital Gains. As he owned the house for more than 3 years, he can use Cost Inflation Indexation(CII) to include the impact of the inflation. Using the Cost Inflation Indexation(CII) figures for the financial year 2007-2008 and 2012-13 he finds that his purchase Indexed Cost is 15,46,279.49 and he has a loss between sale and indexed purchase price of -46,279.49. What tax does he need to pay for the sale of house? Does he need to invest in buying the property or bonds under section 54EC when one has capital gains on selling a house? Answers to question of how to calculate capital gain/loss and taxation on capital loss is discussed in the article. It covers Overview of Capital Gain or Loss and CII, Difference between income from owning a house and Capital Gains on selling the house, Examples of Capital Gain and Loss
Overview of Capital Gain or Loss
Tax on Capital Gains depends upon the length for which the capital asset was held before the transfer.
|Asset||Short Term Capital Asset||Long Term Capital Asset|
|(i) Shares in a company or any other security listed in a recognised stock exchange in India or a unit of a Unit Trust of India or a unit of a mutual fund specified under section 10(23D).||Held for not more than 12 months.||Held for more than 12 months.|
|Assets other than assets mentioned in (i) above for example: House, Debt Mutual Funds, Gold ETF||Held for not more than 36 months.||Held for more than 36 months.|
Sale of a short term capital asset gives rise to Short Term Capital Gains (STCG) and sale of a long term capital asset gives rise to Long Term Capital Gains (LTCG).
Cost Inflation Index (CII)
The rising cost of inflation has its impact on every investor. On the income tax front there is a relief available in the form of the Cost Inflation Index (CII). CII is a figure that is announced by the tax authorities each year that represents the impact of the inflation in the economy. This determines the extent of the benefit that the individual will receive on their investments when they sell them and have a long term capital gain. The manner in which this works is that the CII is used to increase the cost on the investment based on the year of purchase and the year of sale. This is then compared to the selling price to arrive at the final figure as shown below
STCG = Full value of consideration – (Cost of acquisition + cost of improvement + cost of transfer)
Long Term Capital Gain (LTCG)= Full value of consideration received or accruing- (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Indexed cost of acquisition = (CII of year of transfer X Cost of acquisition )/CII of year of acquisition
Indexed cost of improvement = (CII of year of transfer X Cost of improvement)/ClI of year of improvement
Our article Basics of Capital Gain explains Capital Gains, Cost Inflation Index,Indexation and Long Term Capital Gains explains CII in detail with CII figures from 1981. Our Calculator Capital Gain Calculator can be used for calculations.
Example of Capital Gain
Mr. Mehta bought a house worth Rs 8,00,000 in Financial Year 2007-08. He sells the house in Jul 2012-13 for Rs 15,00,000.
- Time between purhcase and sale is 5 years 93 days
- Gain Type: Long Term Capital Gain
- CII of the Purchase Year: 2007 is 551
- CII of the Sale Year: 2012 is 852
- Difference between sale and purchase price: 7,00,000
- Purchase Indexed Cost:12,37,023.59
- Difference between sale and indexed purchase price: 2,62,976.41
- Long Term Capital Gain with indexation(20% of sale and Indexed price):52,595.28
Our article On Selling a property discusses how to save Tax on Long Term Capital Gain by claiming exemption on tax by investing in another property under section 54, 54F, 54EC of income tax or by putting in Capital Gain Account Scheme (CGAS). Can we have a capital loss on selling a house?
Example of Capital Loss
If Mr. Mehta had bought house for 10 lakh and sold for 15 lakh then
- Purchase Indexed Cost:15,46,279.49
- Difference between sale and indexed purchase price: -46,279.49
Mr. Mehta had a loss in above example. Now what should he do?
Income Tax and Loss
To recap from our article Income Tax Overview the gross total income is the sum of all sources of income that an individual has or the total income he earns in a financial year. Income can fall into one of the five heads:
- Income from Salary
- Income from House Property
- Income from Profits and Gains of Business or Profession
- Income from Capital Gains
- Income from other Sources
To recap Return for income earned in a particular financial year (say April 1, 2012 to March 31, 2013) should be filed by July 31 of the immediate next financial year (2013-14). For income earned between Apr 2012- Mar 2013, FY is 2012-13 and AY is 2013-14.
- Financial Year (FY): is the year (starting April 1 to Mar next year) in which you earned the income for which you are filing your tax return.
- Assessment Year (AY): This is the year (starting April 1 to Mar next year) in which you are filing the tax return for a given Financial Year.
For Loss of Income other than Capital Gains
In case of Loss also Income Tax Act allows one to set off loss(es) and/or carry forward of income under sections 70-80. The process of setting of loss on income (on any kind of income – income from other sources, real estate) and their carry forward is covered in following steps:
|Step 1||Inter source adjustment under the same head of income.|
|Step 2||If Loss cannot be offset under Step 1.Inter head adjustment in the same Assessment Year.|
|Step 3||If Loss cannot be offset under Step 1 and 2, Carry forward of a loss.|
For Loss of Income from Capital Gains
If there is a net loss under the head Capital Gains for an assessment year, the same cannot be set off against any other head of income viz., Salaries, House Property, Business or Profession or other sources. It has to be separated into Short term Capital Loss (STCL) and long term capital loss (LTCL).
- Loss from transfer of a short term Capital Asset can be set off against gain from transfer of any other capital asset (Long Term or Short Term) in the same year.
- Loss from transfer of a Long term Capital Asset can be set off against gain from transfer of any other long term Capital Asset in the same year.
- If there is still loss it can be carried forward to next assessment year. In the next year, the STCL can be set off against any gains from transfer of any capital asset (Long term or Short term) and the LTCL can be set off against gains from transfer of long term capital asset only. Any unabsorbed loss after such set off can be further carried forward to next assessment year. A loss for a particular year can be carried forward only if the income tax return for that year is filed by the due date. Capital loss computed in an assessment year can be carried forward for eight assessment years and set off as above.
What is difference between Income from House Property and Capital Gain/Loss from a House?
Income from House Property : Is the income you earn from house property when you own the property. Any residential or commercial property that you own will be taxed. Even if your piece of real estate is not let out, it will be considered earning rental income and you will need to pay tax on it. The income tax authorities tax you on the capacity of the real estate (not let out) to earn income and not the actual rent. This is called the property’s Annual Value and is the higher of the fair rental value, rent received or municipal rent.
- A standard deduction of 30 per cent of the Annual Value is permitted
- Deduction on property tax paid on the rented property
- Any interest paid against outstanding loans taken against the property
In case of one self-occupied house property which has not been actually let out at any time, the annual value is taken as ‘nil’
Capital Gain/Loss from a House: Is the capital gain or Loss one earns when one sells the house. It can be short term capital gain/loss(when sold within 3 years) and long term capital gain/loss( when sold after 3 years). If sold after three years then calculation is done using Cost Inflation Index as shown above.
This is similar to when one owns the shares/mutual funds dividends in the income earned from owing the shares/mutual funds and capital gain/loss is earned when one sells the shares/mutual funds.
As explained above if there is a net loss under the head Capital Gains for an assessment year, the same cannot be set off against any other head of income viz., Salaries, House Property, Business or Profession or other sources. It has to be separated into Short term Capital Loss (STCL) and long term capital loss (LTCL).
- Capital loss cannot be adjusted with any other source of income. For example, you incurred capital loss of Rs.100000 the same time you got the income of Rs.200000 from some other sources. You can not adjust your capital loss with any other head of income.
- Long term capital loss can be adjusted only with the long term capital gains.
- Short term capital loss can be adjusted with both short term capital loss/gain and long term capital loss/gain. Note that short term capital gain is considered as the normal income and will be added to the taxable income. But, in the case of short term capital loss it will be adjusted only with the capital loss.
- If the capital loss cannot be adjusted in the current years because there is no such capital gains, it can be carry forward to the next eight years and adjust if there is any capital gains.
- A loss for a particular year can be carried forward only if the income tax return for that year is filed by the due date
Let’s see how to use it through examples from Income Tax Information Series How to Compute Capital Gains (pdf) (Note: these are for FY 2011-12 or AY 2012-13)
Example : For the A.Y. 2011 – 2012 a resident individual has income under “salaries” of Rs 1,80,000, short term capital loss on sale of shares of Rs. 1,50,000 and long term capital gains on sale of a residential unit of Rs.50,000. He has no other income.
Short term capital loss (STCL) on sale of shares (-) 1,50,000
Long term capital gains(LTCG) on sale of residential unit 50,000
Loss under ‘captial gains’ (-) 1,00,000 ( As Short term capital loss can be adjusted with both short term capital loss and long term capital loss. )
As loss under capital gains cannot be set off against the income under any other head so he can carry forward his Loss under ‘Capital Gains’ (STCL) = 1,00,000 for eight years (i.e. upto A.Y. 2019-2020)
His Taxable income for Year 2012-13: Total income = 1,80,000 Loss under ‘Capital Gains’ (STCL) = 1,00,000 to be carried forward for eight years .
If in A.Y. 2012-13 the assessee has income under Salaries of Rs. 2,30,000, Short term Capital Gains on sale of shares of Rs. 50,000 and no income under any other head.
Income under Capital Gains: Capital gains on sale of shares 50,000, Loss under Capital gains to be carried forward Loss in A.Y. 2011-12 (1,00,000)
Loss set off this year : 50,000(loss on shares) ( As Short term capital loss can be adjusted with both short term capital loss/gain and long term capital loss/gain)
Loss to be carried forward (STCL) : 1,00,00 (loss from earlier years) – 50,000 (gain from this year)
His Taxable income for AY 2012-13 will be : Total Income Income under Salaries 2,30,000 Income under ‘Capital Gains’ 50,000. He can carry his loss upto A.Y. 2019-2020.
For the Assessment Year 2011-12 A resident individual has Income from Salaries of Rs.1,80,000, Long Term Capital Loss on sale of shares of Rs.1,50,000 and a Short term Capital Gains on sale of a residential unit of Rs. 50,000.
As Long Term Capital Loss(LTCL) cannot be set off against Short Term Capital Gains so LTCL to be carried forward Rs. 1,50,000.
Total Income = Salaries (1,80,000) + Short Term Capital Gain (50,000) = Rs 2,30,000 (As short term capital gain is considered as the normal income and will be added to the taxable income)
If in Assessment Year 2012-13, the assessee has income under Salaries of Rs. 2,50,000, Long term Capital Gains on Sale of Share of Rs. 50,000 and no income under any other head
Income under Capital Gains = Long term Capital Gains on Shares( 50,000)- Brought forward loss under LTCG from the Assessment Year 2011-12 (1,50,000) = -1,00,000
His Taxable Income for AY 2012-13 will be : Total Income 2,50,000, Loss under Capital Gains to be carried forward: 1,00,000. Loss can be carried forward upto Assessment Year 2019-2020.
Disclaimer: Please do not construe this as professional financial advice. While efforts have been made to provide correct information, this is our understanding of the Income tax law. Apologies upfront for any mistakes. Please let us know and we will correct. Please don’t send us emails asking us to check your income tax detail. But if you have any doubt on the article or some clarification is required or you feel some information is wrong, Please leave it in comment section so that all readers can benefit. For details check our Disclaimer.
References: Income Tax Information Series How to Compute Capital Gains (pdf)
- On Selling a house
- Basics of Capital Gains
- Cost Inflation Index from Financial Year 1981-82 to Financial Year 2011-12
- Capital Gain Calculator
As Mr. Mehta had a capital loss he does not need to invest sale proceeds in buying the house or investing in bonds under section 54, 54F, 54EC of income tax or by putting in Capital Gain Account Scheme (CGAS). Answers to question of how to calculate capital gain/loss and taxation on capital loss were discussed in the article. It covered Overview of Capital Gain/Loss and CII, Difference between income from owning a house and Capital Gains on selling the house, Examples of Capital Gain and Loss. Hope it has been helpful to you. Looking forward to your comments/feedback.