Capital gain

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

04 March 2015 Respected Sir/Madam,

During the F.y. 2014-15 i have sold one shop on which long term capital gain arises, if i do indexation then my capital gain comes to Rs. 18 lac & tax @ 20% Rs. 3,60,000 , & without indexation my capital gain comes to 20 lacs & tax @10% Rs. 2,00,000. So i am opting for not indexation of cost & pay tax Rs. 2,00,000.
Now, my query is i have also done improvement in property, can i take indexation benefit of indexed cost of improvement or only the actual cost of improvement is available...??

thanks & Regards.

Saravana Perumal Aiyathurai

Saravana Perumal Aiyathurai (Expert)
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04 March 2015 For improvement also you can avail the benefit of indexation and Please provide complete details to answer the query.

Querist : Anonymous

Querist : Anonymous (Querist)

05 March 2015 For,
Saravana p. Aiyathurai

Complete details are as follows:-

purchase year f.y 2010-11,
purchase cost 7.5 lakh
indexed purchase cost= 1080169.

sale value = 27.5 lakh
sale year-- f.y 2014-15

case 1:- when indexation cost benefit is taken.
capital gain=1669831 & tax= 333966 rs.

case 2:- when indexation not taken.
capital gain=20 lakh & tax= 2 lakh

Now, in the f.year 2010-11 , i have spent amt on inprovement of shop rs 2 lakh.

& my query is as i have spent amt on improvement of shop rs 2 lac , can i take indexation benefit of improvement along with non-indexation of cost or i have to indexed both cost & improvement simultaneously..??

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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18 July 2024 In the scenario you've described, when calculating capital gains on the sale of your property, you have the option to either:

1. Apply indexation to both the purchase cost and the cost of improvement, or
2. Not apply indexation to either the purchase cost or the cost of improvement.

Let's break down your options based on the information provided:

### Case 1: Indexation applied to both purchase cost and improvement cost

- **Purchase Details:**
- Purchase Year: F.Y. 2010-11
- Purchase Cost: Rs. 7.5 lakh
- Indexed Purchase Cost (F.Y. 2014-15): Rs. 10,80,169

- **Improvement Details:**
- Improvement Cost: Rs. 2 lakh (spent in F.Y. 2010-11)

- **Sale Details:**
- Sale Year: F.Y. 2014-15
- Sale Value: Rs. 27.5 lakh

- **Capital Gain Calculation:**
- Indexed Purchase Cost: Rs. 10,80,169
- Indexed Improvement Cost: Rs. 2,87,074 (assuming indexation benefit applied for improvement cost from F.Y. 2010-11 to F.Y. 2014-15)
- Total Indexed Cost = Rs. 13,67,243
- Capital Gain = Sale Value - Total Indexed Cost
- Capital Gain = Rs. 13,82,757

- **Tax Payable (assuming LTCG tax rate of 20%):**
- Tax = 20% of Rs. 13,82,757
- Tax = Rs. 2,76,551.40

### Case 2: No indexation applied to purchase cost or improvement cost

- **Capital Gain Calculation:**
- Total Cost (Purchase Cost + Improvement Cost) = Rs. 7.5 lakh + Rs. 2 lakh = Rs. 9.5 lakh
- Capital Gain = Sale Value - Total Cost
- Capital Gain = Rs. 18,00,000

- **Tax Payable (assuming LTCG tax rate of 10%):**
- Tax = 10% of Rs. 18,00,000
- Tax = Rs. 1,80,000

### Conclusion regarding indexation on improvement cost:

- If you opt for indexation on the purchase cost (which you did not in Case 2), it's generally advisable to also apply indexation on the cost of improvement. This is because indexation adjusts the cost of acquisition and improvement to account for inflation, thereby reducing your taxable capital gains.

- In Case 1, where you applied indexation on both the purchase cost and the improvement cost, you arrived at a lower taxable capital gain and hence a lower tax liability.

- If you decide not to index the purchase cost (as in Case 2), you would typically not index the improvement cost either. However, this approach leads to a higher taxable capital gain and potentially higher tax liability.

Therefore, to optimize your tax liability, it's usually beneficial to apply indexation to both the purchase cost and the improvement cost when calculating your capital gains, unless there are specific reasons not to do so (such as when the inflation indexation benefit is minimal or when opting for the lower tax rate without indexation, as you did in Case 2). Always consult with a tax advisor for personalized advice based on your specific financial situation and the prevailing tax laws in your jurisdiction.

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