1. Indexation benefits will be available on sale of a house more than 2 years old, as they are applicable on long-term capital gains tax.
2. The idea behind indexation is that the purchase price should be linked to inflation rate during the holding period, and then only the earnings over and above the inflation-adjusted cost of acquisition should be taxed.
3. This reduces the effective taxable long-term capital gains, thus lowering the tax outgo.
4. Inflation over the holding period is calculated using a govt-notified factor, called Cost Inflation Index (CII), which is released by Central Board of Direct Taxes (CBDT) every year for preceding financial year after the year ends.
5. Tax calculation is as follows:-
a) Indexed purchase price = Original purchase price x (CII of Sale FY / CII of Purchase FY).
b) Long-term capital gains (LTCG) = Sales price – Indexed purchase price.
c) LTCG tax = 20% of LTCG (post-indexation).
6. A few Tips:-
a) You can reduce exclusively incurred sale expenses, e.g. brokerage, commission, advertisement cost, etc. from the Sales price before calculating LTCG tax.
b) You can also reduce any capital expenses incurred in improvement of your house after purchasing it, before calculating LTCG tax.
c) You can reinvest entire Sale amount in purchasing or constructing a maximum of 2 residential properties to avoid LTCG tax under Sec 54.
d) However, LTCG must not exceed 2 crore in order to claim exemption for reinvesting in 2 properties, and this benefit can be claimed only once in your lifetime.
e) New properties must be purchased 1 year before sale, or 2 years after sale, or constructed within 3 years of sale, of old property.
f) If unable to use LTCG amount to buy or construct new houses before date of furnishing of return of income, you should deposit it in Capital Gains Account Scheme (CGAS), or it will become taxable.
g) Even if you have taken a home loan to buy the new property, capital gains exemption is valid under section 54, and also if you used it to repay the home loan.
h) If not interested in property reinvestment, you can invest only LTCG amount (and not total sale proceeds) in NHAI/REC bonds within 6 months, upto a maximum of 50 lakhs, for a lock-in period of 5 years, to avoid LTCG tax under Sec 54EC, although its annual interest rate is quite less and taxable too.
2. The idea behind indexation is that the purchase price should be linked to inflation rate during the holding period, and then only the earnings over and above the inflation-adjusted cost of acquisition should be taxed.
3. This reduces the effective taxable long-term capital gains, thus lowering the tax outgo.
4. Inflation over the holding period is calculated using a govt-notified factor, called Cost Inflation Index (CII), which is released by Central Board of Direct Taxes (CBDT) every year for preceding financial year after the year ends.
5. Tax calculation is as follows:-
a) Indexed purchase price = Original purchase price x (CII of Sale FY / CII of Purchase FY).
b) Long-term capital gains (LTCG) = Sales price – Indexed purchase price.
c) LTCG tax = 20% of LTCG (post-indexation).
6. A few Tips:-
a) You can reduce exclusively incurred sale expenses, e.g. brokerage, commission, advertisement cost, etc. from the Sales price before calculating LTCG tax.
b) You can also reduce any capital expenses incurred in improvement of your house after purchasing it, before calculating LTCG tax.
c) You can reinvest entire Sale amount in purchasing or constructing a maximum of 2 residential properties to avoid LTCG tax under Sec 54.
d) However, LTCG must not exceed 2 crore in order to claim exemption for reinvesting in 2 properties, and this benefit can be claimed only once in your lifetime.
e) New properties must be purchased 1 year before sale, or 2 years after sale, or constructed within 3 years of sale, of old property.
f) If unable to use LTCG amount to buy or construct new houses before date of furnishing of return of income, you should deposit it in Capital Gains Account Scheme (CGAS), or it will become taxable.
g) Even if you have taken a home loan to buy the new property, capital gains exemption is valid under section 54, and also if you used it to repay the home loan.
h) If not interested in property reinvestment, you can invest only LTCG amount (and not total sale proceeds) in NHAI/REC bonds within 6 months, upto a maximum of 50 lakhs, for a lock-in period of 5 years, to avoid LTCG tax under Sec 54EC, although its annual interest rate is quite less and taxable too.