Aug 10, 2013, 05.37 PM | Source: Moneycontrol.com

Know how to save income tax through cost inflation index

Tax guru Subhash Lakhotia explains on how one can save tax expenditure on property gains through cost inflation index methods. He points that it saves substantial amount of income tax on long term capital gains.

Subhash Lakhotia

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. However, it is applicable only in long-term capital gains.

Also read: Do not miss out on fixed income interest

Only when you hold your property for more than 36 months and sell it, the profit is known as long-term capital gain. 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:

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. The resulting figure is to be divided by the cost inflation index for the year in which the asset was acquired.

If, the asset was purchased before April 1, 1981, the cost inflation index for the purpose of acquisition is to be taken as the one on April 1, 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.

It has to be then 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 2013-2014, the table of cost inflation index for the different financial years is given on next page:

For the financial year, 2013-2014 relevant to AY 2014-2015 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 actual year 2014-2015 the tax on long-term capital gains payable is 20 percent.  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 illustrations:

Illustration No.1

Shyam purchased property for Rs 10,00,000 in the year 1981. He sold this in the financial year 2013-2014 for Rs 38,00,000.  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 X939/100 Rs.93,90,000}
        
In this case, the selling price is lower than the cost of acquisition as computed with reference to the cost inflation index [Rs 93, 90,000]

Hence, there will be no capital gains tax payable, rather, there will be a long-term capital loss to the tune Rs 55,90,000 which can be carried forward for adjustment against Shyam’s  total  long-term capital gains.

Illustration No.2

Anurag purchased flat for Rs 20 lakh during the financial year 1991-92 and sold it for Rs.96  Lakhs 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 939/199 = Rs.94,37,185}
[Cost  inflation index for 1991-92 = 199]

Thus, in this case, the long-term capital gains  would be calculated as under :
 
Sale Price                                                                         = Rs 96,00,000

Less: Adjusted cost price taking into                                    =  Rs 94,37,185
account the impact  of cost inflation index

Long-term capital gains.                                                      =  Rs 1,62,815

Illustration No.3

Neelam purchased a piece of land during the financial year 1989-90 for Rs. 6 lakh.  She sold  it for Rs.40 lakh in Financial Year 2013-2014  (A.Y : 2014-2015).  Normally, the capital gains would have been Rs.36 lakh but in view of cost inflation index, the capital  gains would be calculated in the following manner :

6,00,000 X 939 (cost inflation index for 2013-2014)

172 (Cost inflation index for 1989-90)                 =   Rs. 32,75,581

The long-term capital gains as a result of cost inflation index adjustment would be as under :

Sale Price                                              =  Rs. 40,00,000

Less: Adjusted cost price as per              =  Rs. 32,75,581

Cost Inflation Index    ______________
Long-term capital gain                             =  Rs.  7,24,419   

Illustration No. 4 :

Pranab 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.

Financial Year Cost inflation index
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-00 389
2000-01 406
2001-02 426
2002-03 447
2003-04 463
2004-05 480
2005-06 497
2006-07 519
2007-08 551
2008-09 582
2009-10 632
2010-11 711
2011-12 785
2012-13 852
2013-14 939

 

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    Please suggest a good investment option of land in South India. I want to buy a land parcel of around 2 acres.

    A

    If you take a look at the South Indian real estate market, Bangalore has emerged as a clear winner. Due to the strong presence of IT/ITeS an...

  • Q

    I want to invest Rs 20000 per month. I have identified Reliance Small Cap Fund and DSPBR Micro cap fund for investment. I can hold to investments for two years. Is it a good idea to invest in these schemes? How much returns I will be getting?

    A

    If you are an aggressive investor, you can consider investing in either of the 2 funds.DSPBR Micro Cap My suggestion is that if you are inve...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    Suggest couple of equity mutual funds for me. I am keen to invest Rs 25000 per month for next couple of years. I can remain invested for at least five years?

    A

    Asset Allocation Funds are for those investors who want to take an exposure into different asset classes but do not wish to create their own...

  • Q

    I am a senior citizen.I received interest of Rs .1,70,000/- on FD.I have duly filled 15G form.I have NO other source of income.Have I to pay Income tax on this interest or can it be excempted?

    A

    Sir, please note if you are less than 80 years but more than 60 years of age, your total income upto Rs 3,00,000 is exempt from tax, you are...

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

  • Q

    I am 20 years old,I am getting 17+ % or returns from share in my portfolio consistently for the last 6 months.should i think about a career in stockbroking?

    A

    Its nice to note that your portfolio has been gaining such high returns, however it might be too early to take a call and make stockbroking ...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.