Most assets in India are subject to capital gains tax and property is no exception. Here’s help on how to calculate capital gains for your property.
We all love buying assets. These include property, gold, stocks, debentures and Mutual Funds. If you sell these assets for a price that is higher than the price at which you purchased them, you incur a gain. This is called a capital gain. In simple words, the gain or profit that you make when you sell any asset is termed as a capital gain. Since this is not a recurring income (such as your salary), the taxation is different. Here, we try to help you understand how capital gains have to be calculated and how taxation of these gains works.
What is a capital gain?
As mentioned earlier, a capital gain is the difference between what you paid while purchasing an asset and what you received upon selling the asset. Any profit or gain that comes out of sale or transfer of a capital asset will be a capital gain. Capital assets include gold, shares, Mutual Funds, property, among others. Here, we will be dealing with capital gains related to the buying and selling of property.
Capital gains are of two types. One is Short Term Capital Gain (STCG) and the other is Long Term Capital Gain (LTCG). The amount of time you hold the asset for, will determine whether the capital gain you incur is short-term or long-term.
How to calculate STCG
If you sell the property within three years of purchasing it, it will be subject to STCG tax. Here’s the formula for STCG.
STCG =Sale price of the property – (cost of purchase of property + cost of improvement of property + any other expenditure incurred on sale or transfer)
How to calculate LTCG
If you sell a property after holding it for more than three years, then it becomes a long-term asset and LTCG will apply.
Gross LTCG =Sale price of property – (indexed cost of property when it was purchased + indexed cost of improvement of property + any other expenditure incurred on sale or transfer)
Net gains =Gross LTCG – Exemption (if availed) u/s 54 or 54EC or 54F
Additional Reading: How To Reduce Your Existing Home Loan Rate
Concept of indexation for LTCG
You must understand that when calculating LTCG you must take into account the indexed cost of acquisition of the property and not the actual cost of acquisition. This is because the value of money changes over time. The price you paid for the property years ago might actually be worth much more as inflation tends to inflate prices over time. Don’t understand? Let us explain.
Inflation in the country reduces the purchasing power of your money as years go by. For example, you could buy a movie ticket with Rs. 50 a decade ago. Today, you can’t even get a softie cone at a multiplex at that price. That is why you need to find out what price you would have actually paid for the property if you had purchased it today.
Now, how to find the indexed cost of your property? The answer: you have to use the Cost Inflation Index (CII) to do that. This index will give you an idea of how costs have become inflated over time. The central government of India notifies the value of this index every year. The base year for the index is 1981-82. So, the index started at 100 at that point in time.
Here are the CII index figures for the last 10 years:
Financial Year |
Cost of Inflation Index (CII) |
| 2016 – 17 | 1125 |
| 2015 – 16 | 1081 |
| 2014 – 15 | 1024 |
| 2013 – 14 | 939 |
| 2012 – 13 | 852 |
| 2011 – 12 | 785 |
| 2010 – 11 | 711 |
| 2009 – 10 | 632 |
| 2008 – 09 | 582 |
| 2007 – 08 | 551 |
How does indexation actually work?
Here is the formula to calculate the indexed cost of acquiring your property.
Indexed cost price =Purchase price of property * (CII for present year / CII for year of purchase)
Once, you get the indexed cost price, you need to deduct this from the actual sale price of the property to get the actual LTCG.
Additional Reading: How Is A Land Loan Different From A Home Loan?
Here’s an example. Suppose, you purchased a property in 2007 for Rs.40,00,000 which you sold in 2011 for Rs.80,00,000. What will be the actual profits you made on this sale?
| Cost of property purchase – 2007 | 40,00,000 |
| Sale price of property – 2011 | 80,00,000 |
| CII – 2007 | 551 |
| CII – 2011 | 785 |
| Indexed Cost Price | 40,00,000 * (785/551) =Rs.56,98,729 |
| Long-Term Capital gain | 80,00,000 – 56,98,729 =Rs.23,01,270 |
So, your actual gain after selling the property is not Rs. 40,00,000. It is only Rs. 23,01,270. This is the amount you should consider to calculate your taxes.
Long term & short term capital gains tax
As per the tax laws, you are liable to pay tax when you sell an asset for a profit and this includes property. The tax rate will depend on whether it was LTCG or STCG.
Tax on STCG
When you incur STCG, it will be taxed just like your regular income. This means that the gains will be added to your total income for the year and taxed as per the tax slab that applies to you. For example, suppose your total taxable income for the year exceeds Rs. 10,00,000 (after including the gains you have made), you will have to pay tax at the rate of 30%. Here is the tax slab for Financial Year 2017-18.
| Income Slab | Tax Rate |
| Income up to Rs 2,50,000 | No Tax |
| Income from Rs 2,50,000 – Rs 5,00,000 | 5% |
| Income from Rs 5,00,000 – 10,00,000 | 20% |
| Income more than Rs 10,00,000 | 30% |
Additional Reading: Fixed Or Floating Rate: Which Is Ideal For Your Home Loan Now?
Tax on LTCG
Earlier, you could calculate capital gains tax without indexation. However, in the Union Budget FY 2014-15, this taxation was removed. Now, you will need to pay LTCG at the rate of 20% with indexation benefits. Taking the above example used to calculate LTCG, let us now find out what the total tax payable will be.
| Cost of property purchase – 2007 | 40,00,000 |
| Sale price of property – 2011 | 80,00,000 |
| CII – 2007 | 551 |
| CII – 2011 | 785 |
| Indexed Cost Price | 40,00,000 * (785/551) =Rs.56,98,729 |
| LTCG | 80,00,000 – 56,98,729 =Rs.23,01,270 |
| Capital gains tax @ 20% | 23,01,270 * 20% =4,60,254 |
| Total capital gains tax payable | Rs. 4,60,254 |
The tax will be on the LTCG that you calculated after indexation, that is, on Rs.23,01,270 and not on the Rs. 40,00,000 gain made.
Can I get an exemption on capital gains?
While you cannot get any tax deductions or exemptions for STCG, you can reduce or even eliminate your LTCG tax. You can do this by investing in capital gain bonds or in another residential property. If you want to know more, read this – How to Save Tax on Long-Term Capital Gains. Make use of the exemptions too when you make those long-term capital gains.