How to save Capital Gains through Cost Inflation Index!!!!

It is really possible to save substantial amount of Income-tax on your long-term capital gains arising out of selling your immovable property if you take advantage of the Cost Inflation Index concept which, however, is applicable only in respect of long-term capital gains. Only when you hold your property for more than 36

months and then if you sell it the profit so derived is known as long-term capital gain which surely you can save by resorting to the theme of Cost Inflation Index.

The long term capital gains for all types of assets including long-term property gains for all assesses would be computed in the following manner:

FINANCIAL YEAR	COST INFLATION INDEX	FINANCIAL YEAR	COST INFLATION INDEX
1981-1982	100	2000-2001	406
1982-1983	109	2001-2002	426
1983-1984	116	2002-2003	447
1984-1985	125	2003-2004	463
1985-1986	133	2004-2005	480
1986-1987	140	2005-2006	497
1987-1988	150	2006-2007	519
1988-1989	161	2007-2008	551
1989-1990	172	2008-2009	582
1990-1991	182	2009-2010	632
1991-1992	199	2010-2011	711
1992-1993	223	2011-12	785
1993-1994	244	2012-13	852
1994-1995	259	2013-14	938
1995-1996	281
1996-1997	305
1997-1998	331
1998-1999	351
1999-2000	389

1. Cost of acquisition of the asset whether movable or immovable is to be multiplied by the cost inflation index of that year in which the asset is transferred, and the resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired. If however, the asset was purchased before 1st April 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on 1st April 1981.

2. Any cost incurred on the improvement of an asset is to be similarly adjusted with the help of the cost inflation index, i.e. by multiplying the cost of improvement by the cost inflation index of the year in  which the asset is transferred, and be divided by the cost inflation index for the year in which the asset is transferred, and be divided by the cost inflation index for the year in which the improvement to the asset was done.

The Government has notified the cost inflation index for various financial years from 1981-82 to 2012-2013, the table of cost inflation index for the different financial years is given on next page:

For the financial year 2012-2013 relevant to A.Y. 2013-2014 the net  capital gain tax payable by an assessee in respect of long-term capital gains is calculated on the basis of the above cost inflation index.  It may  also be remembered that the benefit of cost inflation index is not available for short-term capital gains or  losses.  Thus, selling property (land, house, flat, etc.) within a period of less than three years from the date of its purchases  is treated as a short-term capital gain or loss in respect of    gain from property.  Thus, the above cost inflation index will be of no use to a person deriving  either a short-term  capital gain or loss.  So, too, the benefit of the cost inflation index is not available to non-resident Indians.

Apart  from the adjustments arising from the cost inflation index the various expenses incurred on improvements to the asset, and on transfer of the asset for example  stamp duty, legal fees payment of brokerage, etc. are deductible from the full value of the sale consideration.  It is the  net resultant figure which will be treated as a long-term capital gain or loss chargeable to income-tax in terms of Section 112 of the Income-tax Act.

For the A.Y. 2013-2014 the tax on long-term capital gains payable is 20% .  thus, tax payment in respect  of long-term capital gains is much  lower than what has been prescribed by the Income-tax Act, if we take into account  the impact  of the cost inflation index.  This is explained  by the following Examples :

Example No.1

Mohan purchased property for Rs.10, 00,000 in the year 1981.  He sold this in the financial year 2013-2014 for Rs.48, 00,000.  The long-term capital gain would be calculated as under:

Cost of acquisition for the purpose of capital gains

 =  { Cost of acquisition x Cost  inflation index of the year of transfer}

 ÷  { Cost of inflation Index of the year in which purchased }

 =  { 10,00,000 X938/100 Rs.93,80,000}

In this case, the selling price is lower than the cost of acquisition as computed with reference to the cost inflation index [ Rs.93,80,000]\

Hence , there will be no capital gains tax payable, rather, there will be a long-term capital loss to the tune Rs. 45,80,000 which can be carried forward for adjustment against Mohan’s  total  long-term capital gains.

Saving Income Tax on Property Gains through Cost Inflation Index.

Example No.2

Prakash purchased flat for Rs.20 lakhs  during the financial year 1991-92 and sold it for Rs.1 crore on 25-7-2013.

Normally, the capital gains should have been Rs.70 lakh but in view  of the adjustments on account of the cost inflation index, the capital gains  would be calculated as under :

{20, 00,000 x 938/199 = Rs.94, 27,136}

[Cost inflation index for 1991-92 = 199]

Thus, in this case, the long-term capital gains would be calculated as under :

Sale Price = Rs.1,00,00,000

Less: Adjusted cost price taking into account the impact  of cost inflation index = Rs.94,27,136

Long-term capital gains = Rs.5, 72,864

                   

Example No.3:

Sunil Kumar purchased property on 1st February, 2013 and sold the same on 16-8-2013.  The cost price was Rs.22 lakh and the sale price Rs.26 lakh, thus the profit is Rs.4 lakh .

As this is  a short-term capital gain, the benefit of cost inflation index is not available and Mr. Kumar is liable  to pay tax at the normal rate.

As shown by the above calculations and illustrations, in most cases the assessee will benefit to a very large extent as a result of cost inflation index