Computing Long Term Capital Gains using Indexation - An Illustration
November 29 , 2012

Consider the following transactions in your house:

Date of purchase

15 June 1995

Purchase price (including registration, stamp duty and brokerage)

Rs 20 lakhs

Date of sale

30 September 2008

Sale price (after subtracting brokerage)

Rs 65 lakhs

Now assume we want to calculate the capital gains tax applicable on this. The steps are as follows:

1. Recognise that purchase is in 1995-96 and sale is in 2008-09. Since the difference is more than 3 years (refer the ready reckoner on tax), it is a long term capital gain and there will be benefit of indexation available

2. Look up the ready reckoner for the Cost Inflation Index (CII) for these two years. In our case, it is 281 and 582, respectively

3. Calculate the indexed cost of acquisition

 Indexed Cost of Acquisition = Actual Purchase Price *  Indexation Factor

Where Indexation Factor is  calculated as follows:

 Indexation Factor = Cost inflation index of the year of sale/Cost inflation index of the year of purchase

4. Calculate the long term capital gains (LTCG)

 Long Term Capital Gain = Sale price - Indexed cost of acquisition

5. Look up the ready reckoner to note that LTCG rate on real estate is 20%. Thus:

 Tax = 20% of Long term capital gain calculated

Thus, your capital gains tax liability from the sale of the house is Rs 4.72 lakhs

Some useful points to note:

  • As always, capital gains tax is only payable when an asset is sold
  • This being long term capital gains, there are ways to avoid the tax liability. These ways include tax saving bonds and investing in another residential real estate
  • Note that all expenses related to purchase are included in the purchase price. Similarly, all expenses related to sale are subtracted from sale price. This helps reduce your tax liability

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