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The CBDT has notified the Cost Inflation Index effective from 1 Apr 2017 Applicable from FY/ PY 2017-18 (AY 2018-19) onwards, with Base Year shifted to 2001-02.  Till 31 Mar 2017, capital gain was calculated with 1981 as the base year. This article gives Cost Of Inflation Index to be used from 1 Apr 2017 for calculating Long Term Capital Gain on Sale of real estate, unlisted shares, gold.  It also gives an overview of Indexation and Long Term Capital Gains.

 the Cost of Inflation Index for FY 2019-20 / AY 2020-21 is 289

Cost of Inflation Index from FY 2001-02 to FY 2019-20

SI. No. Financial Year(FY) Assessment Year(AY) Cost Inflation Index
1 2001-02 2002-03 100
2 2002-03 2003-04 105
3 2003-04 2004-05 109
4 2004-05 2005-06 113
5 2005-06 2006-07 117
6 2006-07 2007-08 122
7 2007-08 2008-09 129
8 2008-09 2009-10 137
9 2009-10 2010-11 148
10 2010-11 2011-12 167
11 2011-12 2012-13 184
12 2012-13 2013-14 200
13 2013-14 2014-15 220
14 2014-15 2015-16 240
15 2015-16 2016-17 254
16 2016-17 2017-18 264
17 2017-18 2018-19 272
18 2018-19 2019-20 280
2019-20 2020-21 289

Indexation and Tax on Long Term Capital Gains

Indexation refers to the adjustment in the purchase price of an investment for the inflation rate during the period for which it was held. This inflated cost is considered as the purchase price while computing the gains arising from the sale of the asset from the taxation perspective. When you sell property, gold, shares, mutual funds, you need to pay capital gain. If the holding period of asset i.e time between sale and purchase of the asset is more than 2 years for property and more than 3 years for unlisted shares, gold, and debt funds then one uses Cost of Inflation Index for calculating Long Term Capital Gains (LTCG) to reduce the tax.

The formula for calculating the new Purchase price using  Cost of Inflation Index is as below.

Indexed Cost of Acquisition=(Cost of Acquisition * Cost of the Inflation Index (CII) for the year in which the asset was sold or transferred.)/ The cost of Inflation Index (CII) for the year in which the asset was first held by the assessee OR FY 2001-02, whichever is later.

Let’s see the how the indexed cost of acquisition will be calculated using Cost of Inflation Index or CII. If Shyam purchased the property in FY 2005-06 at Rs.80 lakh when Cost of  Inflation Index or CII is 117 and sold the same in FY 2017-18 at Rs.1.5 Cr when Inflation Index or CII is 272.

However, if Shyam does not consider the indexed cost, then the gain would be as Rs.90 lakh  (Rs.1.5 Cr-Rs.60 Lakh).

But as Shyam has held the property for more than 2 years, he can use Cost Inflation Index to bring down the tax. So the new purchase price taking care of inflation using Cost of Inflation Index or CII is 

Indexed Cost of Acquisition or Purchase Price =(60,00,000 * 272)/117=Rs.1,39,48,717.95. (Around 1.39 crores)

So the Long Term Capital Gain=Selling Price-Indexed Cost of buying property=1.5 crore – 1,39,48,717.95 = 10,51,282.05 (around 10.5 lakh)

Change of Base Year for Calculation of Capital Gains

In Budget 2017, Finance Minister Arun Jaitley had proposed to change the base year to calculate the indexation benefit from 1981 to 2001 in the budget.  The change in the base year is across all asset classes but the impact would differ across assets that enjoy indexation benefit on long-term capital gains—real estate, unlisted shares, gold and bond funds.
Till 31 Mar 2017, capital gain was calculated with 1981 as the base year. This means that the purchase price of an asset bought before 1 April 1981 could be calculated on the basis of the fair market value of 1981. From 1 Apr 2017, the purchase price will be calculated based on the fair market value of 2001. Accordingly, capital gains on assets acquired before 1 April 2001 will also be calculated using fair market value as on 2001.
Mostly the property owners who would benefit from this revision in the base year from 1981 to 2001. Our article Change of base year impact on Capital gains explains how the change in base year impact Capital Gains of property in detail.
Those who have invested in debt funds would have to pay more tax.
Change of Base Year from 1981 to 2001 impact on Capital Gains cost of inflation index

Change of Base Year from 1981 to 2001 impact on Capital Gains

Overview of Capital Gain Tax on Sale of House or Property

Our article How to Calculate Capital gain Tax on Sale of House or property? explains it in detail.

  • The time period: Check the time period between when you bought the house/property and when you sold it.  if you have inherited the property the period of holding will be considered from the date of purchase by your ancestors.
    • If a property is sold within two years(from FY 2017-18 earlier was three) of buying it, it is treated as a short-term capital gain. This is added to the total income and taxed according to the slab rate.
    • If a property is sold after two years (from FY 2017-18 earlier was three) years from the date of purchase, the profit is treated as a long-term capital gain(LTCG) and is taxed at 20% after indexation.
  • The Purchase cost and Fair Market Value If the property is purchased before 1 Apr 2001 then the fair market value of the property as on 1 April 2001 can be considered as the cost of acquisition. For ascertaining the Fair market value, it is best to engage the services of a registered valuer.  Our article Fair Market Value: Calculating Capital Gain for property purchased before 2001 covers it in detail
  • House improvement cost and transfer cost: While computing the cost of acquisition one can also add the costs incurred with respect to procedures associated with house improvement or transfer cost such as the will and inheritance, obtaining succession certificate, costs of the executor, property valuer etc.
  • Find the indexation purchase costThe long-term capital gain(LTCG) shall be computed as the difference between net sale proceeds and indexed cost of purchase. For indexation, the cost of acquisition should be adjusted by applying the cost inflation index (CII).
  • Find the capital gain. Check out our Capital Gain Calculator from FY 2017-18 with CII from 2001-2002 
    • For short-term capital gain = final sale price – (the cost of acquisition + house improvement cost + transfer cost).
    • In case of long-term capital gain, capital gain = final sale price – (transfer cost + indexed acquisition cost + indexed house improvement cost).
  • Saving Long Term Capital Gain: If there are any long-term capital gains, one may have to either
    • Pay tax on it at the rate of 20% OR
    • Buy House OR
      • 1 year before the sale or
      • 2 years after the sale of the property/asset OR
      • Construct a  new residential house property must be constructed within 3 years of the sale of the property.
    • Save capital gains tax by buying specified bonds under Capital Gain Account under section 54EC before filing Income Tax Return for that year. Our article Capital Gains Account Scheme and Sale of property explains it in detail.
  • Capital LossSet off of Capital Losses: The Income Tax does not allow Loss under the head Capital Gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head. Our article Capital Loss on Sale of House discusses it in detail.
    • Long-Term Capital Loss can be set off only against Long Term Capital Gains.
    • Short-Term Capital Losses are allowed to be set off against both Long-Term Gains and Short Term Gains.
  • Carry Forward of Losses if the return is filed before due date: If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed.  To keep a track of your losses, the Income Tax Department has laid out that Losses for a year cannot be carried forward unless that year’s return has been filed before the due date. Even if it’s a loss return, you do not have any income to show – do file your return before the due date.
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