Know Your Capital Gains Tax

KNOW YOUR CAPITAL GAINS TAX

Taxes on property in our country are of two types – short term and long term. While the rates of both are the same, the differences lies in the inflation indexation which is taken into consideration i.e., the inflation rate of the future based on data collected.

Short Term Capital Gains Tax: When you have bought a property and sold it within three years of purchase, then this tax is applicable. You will then pay taxes on profit. But acquisition price, money spent on property improvement, and transfer cost will be deducted. This gain is part of the taxable income and the tax as per your applicable income slab has to be paid. If you made a loss in the transaction, tax deduction can be claimed.

Long Term Capital Gains Tax: When you have owned a property for more than three years you are eligible for deduction of acquisition cost and property improvement but these adjustments will be inflation adjusted. Margins on the property come down for periods extending to more than five years.

Long Term Capital Gain

Long Term Capital Gain = Sale Price – (Indexed cost of acquisition+ indexed cost of improvement + cost of transfer)

Indexed Cost= Cost incurred (multiplied by) (CII year of transfer / CII of year of acquisition or expenditure) where CII stands for cost inflation index. This CII is a measure of the impact inflation has on the cost. The CII is decided by the government. In 1995-96 it was 281 and in 2011-12 it was 785.

Long term capital gains on property sale cannot claim regular tax deductions. However, if you are in the tax exemption limit, then your capital gains will bot be taxed.

You may save your capital gains by reinvesting in property purchase or by investing in capital gain bonds within a period of three years.

Please feel free to contact us with your questions on capital gains.

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