Capital Gains arise when a residential property
is sold for a value higher than the cost of
purchase or construction. There are two categories
of capital gains. Short-term capital gains arise
if a house is sold within 36 months from date
of purchase. If a house is sold after 36 months
from date of purchase or construction, the surplus
will be taxed as long-term capital gains.
The distinction between short-term and long-term
capital gains is important, as the rates of
tax are different. Short-term capital gains
is added to other heads of income like salary,
income for business or profession, and other
incomes like interest etc. and taxed at the
relevant slab rate. In the case of long-term
capital gains, the tax is a flat rate of 20
percent on the capital gains amount, plus applicable
surcharge.
Capital losses can be set off against other
heads of income, except long-term capital losses
that can be set off only against long-term capital
gains.
COMPUTING CAPITAL GAINS
Capital gains is computed by deducting from
the amount of sale consideration the following:
a) Cost of acquisition of the property, including
cost of any improvements made or any capital
expenditure for modifications and/or renovation
that is permanent in nature
b) Adjustment factor for indexation, and
c) Costs or expenses relating to the sale of
the property e.g. brokerage, commission etc
INDEXATION
Indexation is a deduction allowed to adjust
for inflation during the period of property
ownership. Indexation helps to tax real profits
and not inflationary profits. The government
publishes the annual cost inflation index every
year for the current year 2004-05 the index
is 480 (base year 1981-82 – 100)
The indexed cost if calculated by multiplying
the asset cost with the index of the year of
sale and dividing the result with the index
of the year of purchase or construction
The Income Tax Act has two situations where
capital gains tax on sale of residential property
need not be paid
Situation 1:
Investment in another residential property (Section
54)
If the full amount of capital gain is spent on
purchasing or constructing a new property, there
will be no tax liability. If the amount spent
on the new property is less than the capital gains
amount, then the difference between the cost of
new property and the capital gains amount will
be taxed. There are time limits for purchase and
sale prescribed in the section which should be
compiled with. If the new property is not acquired
immediately in the same financial year or within
the date for filing the return of income, then
the capital gains amount should be deposited in
a Capital Gains Deposit Account Scheme with a
nationalized bank.
Situation 2:
Investment in financial assets (Section 54 EC)
If the full amount of capital gain is invested
in specific bonds there will be no tax liability.
Presently, bonds issued by NABARD, Rural Electrification
Corporation, National Highways Authority of India,
National Housing Bank, and Small Industries Bank
of India is notified for this purpose. The investment
should be made within six months from date of
sale and there is a lock-in period of three years.
AN EXAMPLE
OF CALCULATION OF CAPITAL GAINS ON SALE OF RESIDENTIAL
PROPERTY
Case:
|
