There are a number of capital gain calculators available online that individuals can use to see how much they stand to receive as profits from the sale of property. Based on the input provided in the calculator, which includes purchase price, sale price, etc., an individual will be able to view the amount he or she stands to receive in the form of capital gains.
Calculation of capital gains can also be done manually. Here is an example:
Mr. Joshi purchased a property in September 2004 for an amount of Rs. 60 lakhs. After a decade, he decided to sell the property for Rs 1.5 crores. For the purpose of calculating the gains, the cost shall be indexed since the asset falls under the long-term category.
The CII for 2004-05 shall be factored in for the purpose of indexation. Therefore, cost for calculating capital gains for Mr. Joshi shall be Rs. 60 lakhs x CII of 2014-15/CII of 2004-05. This would total to Rs. 1.28 crores (60,00,000 x 1024/480). The net gain for Mr. Joshi is Rs. 22 lakhs.
Sale of property would result in a large cash inflow. Any profit that is made from this transaction shall be treated as capital gains. Knowledge of capital gains is essential not only for assessing the surplus, but also helps in determining how much in taxes an individual would have to pay.
Now, for the purpose of tax calculation, capital gains on the sale of property can be classified into ‘long-term’ or ‘short-term’. Profits from the sale of property owned for more than two years is referred to as long-term capital gains. If the property is sold in less than two years from its purchase, the profits, if any, will be regarded as short-term capital gains. Taxes applicable will differ depending on which of the categories the gains get placed in.
In order to calculate short-term capital gains, the following costs need to be deducted from the final sale price of the property:
In order to calculate long-term capital gains, the following costs need to be deducted from the final sale price of the property:
The tax on long-term capital gains is payable at the rate of 20% (plus education cess 4% for FY 2018-19/AY 2019-20 and 3% for FY 2017-18/AY 2018-19). One cannot claim any kind of deductions under Chapter VI-A (like deductions under Section 80C, 80D, etc.) from such gains. Should an individual have invested or contributed any amount into tax-saving instruments, he or she must claim that sum from gross income, excluding LTCG. If the taxable income after availing all the deductions is below the maximum exempt limit, as per slab rates for individuals, which presently is Rs. 2,50,000, then the difference between Rs. 2,50,000 and the taxable income (not including these gains) shall be allowed as deduction, and the individual will be levied tax at the rate of 20% on the remaining sum.
The amount of tax applicable on short-term capital gains from the sale of property will come down to which income tax slab rate a person falls in. The income tax slab for FY 2018-19 is as under:
| Income Tax Slabs | Tax Rate | Health and Education Cess |
|---|---|---|
| Income up to Rs 2,50,000 | No tax | - |
| Income from Rs 2,50,000 – Rs 5,00,000 | 5% | 4% of Income Tax |
| Income from Rs 5,00,000 – 10,00,000 | 20% | 4% of Income Tax |
| Income more than Rs 10,00,000 | 30% | 4% of Income Tax |
Source: The Income Tax Department
Cost inflation index (CII) is an important element in the calculation of inflation-indexed long-term capital gains. It helps in evaluating the estimated increase in price of property due to inflation.
Long-term capital assets, like residential property, are recorded at cost price. Even with the rising inflation, they exist at the cost price and cannot be revalued. When such assets are sold, the gains will be considerably high, which in turn means high income tax. For the benefit of the taxpayers, CII benefit is applied to the long-term capital assets, on account of which purchase price increases, reflecting the current market value. This brings down the profits and lowers the taxes applicable.
The below table shows the value of CII from base year 2001-02:
| Financial Year | Assessment Year | CII Value |
|---|---|---|
| 2017-18 | 2018-19 | 272 |
| 2016-17 | 2017-18 | 264 |
| 2015-16 | 2016-17 | 254 |
| 2014-15 | 2015-16 | 240 |
| 2013-14 | 2014-15 | 220 |
| 2012-13 | 2013-14 | 200 |
| 2011-12 | 2012-13 | 184 |
| 2010-11 | 2011-12 | 167 |
| 2009-10 | 2010-11 | 148 |
| 2008-09 | 2009-10 | 137 |
| 2007-08 | 2008-09 | 129 |
| 2006-07 | 2007-08 | 122 |
| 2005-06 | 2006-07 | 117 |
| 2004-05 | 2005-06 | 113 |
| 2003-04 | 2004-05 | 109 |
| 2002-03 | 2003-04 | 105 |
| 2001-02 | 2002-03 | 100 |
| Financial Year | Index | Financial Year | Index |
|---|---|---|---|
| 1981-82 | 100 | 1999-00 | 389 |
| 1982-83 | 109 | 2000-01 | 406 |
| 1983-84 | 116 | 2001-02 | 426 |
| 1984-85 | 125 | 2002-03 | 447 |
| 1985-86 | 133 | 2003-04 | 463 |
| 1986-87 | 140 | 2004-05 | 480 |
| 1987-88 | 150 | 2005-06 | 497 |
| 1988-89 | 161 | 2006-07 | 519 |
| 1989-90 | 172 | 2007-08 | 551 |
| 1990-91 | 182 | 2008-09 | 582 |
| 1991-92 | 199 | 2009-10 | 632 |
| 1992-93 | 223 | 2010-11 | 711 |
| 1993-94 | 244 | 2011-12 | 758 |
| 1994-95 | 259 | 2012-13 | 852 |
| 1995-96 | 281 | 2013-14 | 939 |
| 1996-97 | 305 | 2014-15 | 1024 |
| 1997-98 | 331 | 2015-16 | 1081 |
| 1998-99 | 351 | 2016–17 | 1125 |
Any capital asset which is held by an individual for over 36 months, immediately preceding the date of its transfer, shall be regarded as long-term capital asset. Starting from AY 2018-19, the period of holding of immovable property, such as land or building, is 24 months instead of 36 months.
Long term capital gain arising from sale of long-term capital asset shall be computed as follows:
| Particulars | Rs. |
|---|---|
| Full value of consideration (i.e., Sales consideration of asset) | XXXXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) | (XXXXX) |
| Net sale consideration | XXXXX |
| Less: Indexed cost of acquisition | (XXXXX) |
| Less: Indexed cost of improvement, if any | (XXXXX) |
| Long-Term Capital Gain | XXXXX |
Source: The Income Tax Department
Short-term capital gain from sale of short-term capital asset is computed as follows:
| Particulars | Rs. |
|---|---|
| Full value of consideration (i.e., Sales value of the asset) | XXXXX |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.) | (XXXXX) |
| Net sale consideration | XXXXX |
| Less: Cost of acquisition (i.e., the purchase price of the capital asset) | (XXXXX) |
| Less: Cost of improvement (i.e., post purchase capital expenses incurred on addition/improvement to the capital asset) | (XXXXX) |
| Short-Term Capital Gain | XXXXX |
Source: The Income Tax Department
Indexation is a process whereby a capital asset’s cost of acquisition is adjusted against inflationary rise. The benefit of indexation only applies to long-term capital assets and not for short-term capital assets.
According to Section 54EC of the Income Tax Act, 1961, one can claim tax relief by parking long-term capital gains from sale of land or building into bonds issued by the Rural Electrification Corporation Limited or the National Highway Authority of India. The investment needs to be made within 6 months from the date of transfer of the asset and bonds must not be redeemed before three years. The maximum amount that qualifies for investment is Rs. 50 lakhs. In other words, this deduction cannot be claimed for more than Rs. 50 lakhs. This benefit is not available for short-term capital gains.
