We tend to purchase a property as an investment for selling purpose with the aim of gaining from capital appreciation which almost always gives good returns except in times of severe economic adverse conditions, when it’s temporarily affected. But good returns always attract a hefty tax outgo which could dilute the gain in our hand. So, in the income tax parlance, profit earned from sale of any asset is to be said as ‘Capital Gain’. And the taxes levied by income tax department on capital gain are called as ‘Capital gain tax’.So, the Capital gains tax is definitely a vital aspect that every property seller must consider in a cost-sensitive market. The arising of capital gains from any asset which is the most likely in the property, are segregated into the two terms as long-term or short-term gains, based on its holding period of investment. For instance, in real estate market, if any asset is held for more than 3 years, it is treated as long term and the short-term holding period is considered as less than 3 years. Short-term capital gains are to be taxed at prescribed income tax rates, which could range from 10.30% to 30.90% for any assessment year. That’s why; those who churn real estate investments rapidly are likely to pay the higher tax, hence no exemption. This is because if the property is sold within three years of purchase, the short-term capital gain is arithmetically calculated by deducting from the full value of consideration received from actual cost of acquisition including the money spent on improving the property and the transfer cost.

capital gain

Holding Period

In case of an immovable property such as a plot and a flat or bungalow, many property holders may tend to confuse about its holding period of respective asset. So, it is determined from the day after you bought your investment until the date you sell your investment. The day you disposed of the property is part of your holding period. Another question is also triggered in their mind as to determination of the nature of capital gains i.e. long term or short term while taking the possession of the flat, but is to pay the amount due in installments. In that case, the period of holding should not be computed from the date of final payment to the date of sale. By the legislature of law the words ‘held by a taxpayer’ and not ‘owned by the tax payer’ means the period of holding would be computed from the date of possession to the date of sale of flat. Similarly, if any taxpayer transfers his rights under an agreement for the purchase of an immovable property, before a formal purchase deed comes to be executed, the period of holding would also be computed from the date of possession to the date of transfer his rights, not owned by property.

Cost of Acquisition

Any profit booked before three years of buying the property is considered a short-term gain. The calculation is the same as that for short-term gain because the actual cost of acquisition of any property would have remained the same value for which the property has been acquired by the taxpayer. However, if the property is sold after three years of purchase, the resultant gains known as long-term gains. That apart, the acquisition cost of the property is recalculated based on indexation, which factors inflation in its calculation by using the Cost Inflation Index. This brings up the actual cost of acquisition of your property. And your capital gain will be considerably lower after indexation as compared to the short-term capital gain.

Expenditure and Cost of Improvement

One of the advantages associated with cost of acquisition is the inclusion of expenditure incurred wholly and exclusively in connection with transfer and the cost of any improvement thereto while determining the gain. This would also include expenditure in the nature of stamp duty, registration charges, legal fees, brokerage or commission, travelling expenses etc. Even, interest paid on loan for acquiring any property is treated as part of cost of acquisition subject to condition that taxpayer would not claim any interest deductible on housing loan under section 24 or against income from other sources under section 57 as double deduction for the very same interest is not allowed by the same taxpayer.

Indexation Cost Benefit for long-term investment

Since inflation reduces the value of existing property over time, it is essential to increase the initial cost of the property to calculate its current value. A new concept of ‘Indexed Cost of Acquisition’ and ‘Indexed Cost of improvement’ has been introduced for the benefit of seller who is able to inflate the value of property linked to ‘Cost of Inflation Index’ (CII) which has been notified by the Central Government and which is being annually updated. This is done by multiplying the original cost price with inflation factor for the year of sale. Hence, the indexation of purchase price helps to reduce the net capital gain, thereby slashing the tax burden for the seller.

Capital Gains on Gifted & Inherited Property

Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven’t paid any money to acquire it. But a little respite here that capital gains will be computed on the basis of the cost to the previous owner and indexed to the year of purchase shall be deemed to be cost of acquision of the taxpayer.

Let’s say your grandfather had acquired a plot of land for Rs10 lakh in late 1981, which you received by way of inheritance on his death in 2012 and you were planning to sell the same in early 2013 for a consideration of Rs 84 lakh. Would you believe that your liability to pay a ‘zero tax’? While considering the ‘Cost Inflation Index’ of 852 for financial year 2012-13 with reference to the CII of 100 for 1981-82, the indexation cost of acquisition of the plot of land inherited and proposed to be sold by you would work out to Rs85.20 lakh. Since your sale consideration is expected to be Rs84 lakh, you will end up with the good fortune of enjoying zero tax.

It is concluded that benefit of indexed cost of acquisition is given to ensure that the taxpayer pays capital gain tax on the ‘real’ or actual ‘gain’ and not on the increase in the capital value of the property due to inflation.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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