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  • Category: Tax Planning

    How to calculate capital gains after the new revision of base year

    Want to repeat calculation of capital gains after base year revision? Looking out for the detailed procedure? Here, on this page find responses to yuor queries.

    From last year's budget, the base year for calculating capital gains is now changed to 2001 instead of 1981.
    Though I read a few sources in the internet, I am not able to understand it properly.
    Suppose I have purchased a residential property say in 1995 for an amount of Rupees Five lakhs. Suppose I have spent another Two lakhs in 1999 for improvement. Suppose I am selling it in 2017 for Twenty lakhs. Then how the capital gains is calculated using the new indexation? Please do not repeat the bare act or text. Kindly show it practically with above example figures.

    My question is: how to arrive at the cost as on the new base year from the original cost and also improvement? That is, the five plus two –seven lakhs would have become some other amount due to inflation as on 2001 also. How that figure is calculated?
  • Answers

    3 Answers found.
  • The capital gain is considered by applying cost inflation index in a particular way for taxation purpose.

    The base year is 1981 and index in that year is taken as 100. The Govt has proposed new base year as 2001 and indexes for subsequent years will be announced soon. Till then we have to calculate as per old indexes. Anything before 1981 will be considered as if in 1981.

    Now coming to the formula for capital gain.

    Capital gain = Sales amount - (purchase amount*index of year of sale/index of year of purchase)

    Now as per your data your purchase cost is 5 lac in 1995 and renovation cost is 2 lac in 1999.

    The index for 2017 is yet to be announced. For understanding purposes let us assume you sold the property for 20 lac in 2016 and let us calculate capital gain.

    The index for 1995, 1999 and 2016 is 281, 389 and 1185 respectively.

    As the indexing for 5 lac and 2 lac will be different they will be calculated separately but will be added for subtraction from sale amount.

    So it will be more clear from the calculation below-

    Capital gain = 20 - ((5*1185/281)+(2*1185/389))

    This comes to a negative value and taken as zero.
    So your capital gain is zero thanks to the indexing and naturally you have no tax liability on this but do not forget to show it in your I Tax return as it is a crucial tax information.

    If the calculation gives a positive value you have to pay tax only on that value as per the rates of income tax on capital gain.

    Knowledge is power.

  • The base year for calculation of capital gains from 1981 is shifted to 2001. This is announced by the finance minister recently. By this shift when you sell some of your assets like bullion, lands, houses etc., your tax liability will come down, if you have acquired that asset before 2001.
    A detailed information has been given on the site mentioned below. For the details, you can please refer that.

    always confident

  • With change in base year for capital gain purpose your case has come in one of the exceptions, where the computation of long term capital gain tax requires a little effort from your end.
    If there was no revision in base year then the answer provided by Umesh above was correct but after the change the tax computation will also change. Let's explain the same in detail to you.
    Since 2001 is the new base year hence the base index will be 100 for 2001 and will go up for future years. Since your property is prior to base year as well as the additional work done by you is also preceding base year hence, indexation is not possible till year 2001. To arrive at the exact cost of your property in the base year i. e. 2001, you will have to find the FMV or fair market value as in 2001. The FMV will be your considered as cost price.
    To arrive at FMV you will have to refer to the circle rate prevailing in the area you live in and accordingly compute the same or else take help of authorized valuer who will help you to arrive at exact FMV or cost price of property.

    Now, once you have arrived at the cost price then computation of long term capital gain is simple. As you said that sale price of property is Rs. 20 lakhs and I am assuming cost price as 10 lakhs.
    Now the computation will be as below:
    CII for 2000 - 01 :100
    CII for 2017-18 : 272
    LTCG = Sale price - Indexed cost of acquisition.
    I.e. 20 - (10 x 272/100) = - 7.2 lakhs.

    It will be long term capital loss for which there will be no tax liability but you can carry forward this loss to future years to set off any long term capital gain that will arise in future for next 8 years.

    Only thing you need to actually do is to find the FMV in order to arrive at exact loss for purpose if carrying forward. Just to add that in order to carry forward the loss and set off against future long term capital gain you need to disclose the same in your tax return which you file for FY 2017-18.

    Live before you leave.

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