The long and short of capital gains tax

Mumbai: She did not love him anymore and she had told this to him almost two years back. But he continued, calling, e-mailing, sms-ing and meeting her in the hope of bringing her back.

But he couldn’t. The bond they had shared had broken. And now she was getting married to someone else. The marriage was scheduled for April 22, 2006, exactly six years after they had fallen in love.

She had called him and said, “We can still be friends,” to which he had replied using the lines of his favourite song, I love you too much to ever start liking you. And so he had decided to leave Delhi — lock, stock and barrel.

March 1, 2006
Piece by piece, he sold off, everything that he had accumulated in his dream house. And then finally he managed to sell the flat on March 1, 2006.

He had bought the flat on April 22, 2002, for Rs 17 lakh (including expenses like brokerage, registration fees, stamp duty etc).

He sold the flat for Rs 80 lakh. With the Delhi metro coming to this part of the town, prices had touched the roof. Having sold his flat, he wanted to figure out the tax implications of the capital gain on selling the flat. And so he met a chartered accountant (CA)-friend of his.

“When an individual sells a house and makes a profit selling it, it’s known as a capital gain. The tax paid on that the capital gain is known as capital gains tax. The amount of tax to be paid depends on the period of owning the asset,” started the CA.

“So, what would be my tax liability?” he asked.

“The fact that you have owned the house for more than 36 months makes your capital gain a long-term capital gain. And so you will have to pay a tax amounting to 20% of the indexed cost of acquisition,” replied the CA.

“What’s this indexed cost of acquisition?” he asked.

“Indexation is essentially a way of taking inflation into account into the cost of acquiring the house and, hence, reducing the tax to be paid. Every year, the Reserve Bank of
India notifies an inflation index for that particular financial year (FY).

In your case, the year of purchase was FY 2002-03, and the inflation index for the year was 447. You sold the flat in FY 2005-06, and the inflation index for that year was 497.

Then a ratio is calculated by dividing the inflation index of the year of sale, which is FY 2005-06, by the inflation index of the year of purchase, which is 2002-03.

So you divide 497 by 447 to obtain an inflation index of 1.112. This is multiplied by your cost of acquiring the flat, which is Rs 17 lakh, and gives you the indexed cost of acquisition, which works out to be Rs 18.90 lakh (Rs 17 lakh x 1.112).

Hence your capital gain works out to be Rs 61.1 lakh (Rs 80 lakh- Rs 18.9 lakh). On this figure, you have to pay a tax of 20%, which works out to be Rs 12.22 lakh (Rs 61.1 lakh x .2),” replied the CA.

“If you had sold the asset before 36 months, then the resultant gain (difference between the sale price and the purchase price), without indexation, would have been added to your income, and you would have been taxed at the rate of the tax bracket you fall under.

That’s how short- term capital gain tax would have been calculated. Further, there are ways by which you can avoid paying the long term capital gain tax as well,” continued the CA.

By the time the CA finished, he was lost in his own world, feeling a little rich, and whistling the old Beatles number, ‘Coz I don’t care too much for money, for money can’t buy me love. 

(The example is hypothetical)