My client has a flat on which he is paying monthly installments... bt now he wants to sell the flat... As he has not yet paid all the installments he can not be called an ownr of that flat... so will the sale transaction attract capital gain...?
10 Replies
CA Pallav Singhania
(IT System Auditor)
(33262 Points)
Replied 14 September 2011
owership is not transferred to him....howerevr the flat is under his possesion.....
Rajagopalakrishnan R
(PARTNER)
(1422 Points)
Replied 14 September 2011
I guess u mean that the progress payments on the flat under construction is still going on and he wants to transfer the flat under construction. He would no doubt have entered into an agreement with the builder for the falt purchase/construction. By virtue of this agreement, he get a capital asset in the form of a right to get the flat transferred to him as and when - construction is complete and payment is complete.
This right is what is being transferred at this stage and surely this can attract cap gains.
Annu.R
(CA,CS,B.Com)
(2788 Points)
Replied 14 September 2011
At this time the flat owner is bank not him........but he can enter in only conditional agreement and when the sale will matured ...........then the time will count/attact for ...........is it a long term or short...........
Annu.R
(CA,CS,B.Com)
(2788 Points)
Replied 14 September 2011
If he is saling it withing 36 months then it will not counted in long term capital gain otherwise it is a long term.............
CA Mayank Tulsyan
(B.Com(H), ACA)
(274 Points)
Replied 15 September 2011
so the no. of yrz for long term gain will be calculated frm the last installment or from first installment?
Annu.R
(CA,CS,B.Com)
(2788 Points)
Replied 15 September 2011
Long Term Capital Gains (LTCG) on Sale of a House – Calculation and Income Tax
Sale of a house often results in long term capital gains. But its calculation is not very simple – the cost of acquisition has to be indexed using the cost inflation index numbers. The cost of improvement also has to be added before calculating the capital gain.
This article guides you through the entire process by giving step by step calculations for arriving at the long term capital gains on sale of a house. You can also download a spreadsheet containing examples for many different scenarios.
In “Long Term and Short Term Capital Gain – Income Tax Calculation”, we understood what a capital asset is, what capital gain is and how it is classified into long term capital gain & short term capital gain.
We also briefly touched upon the topic of income tax calculation on these gains.
Now, let’s understand calculation of long term capital gain on a sale of a house (a flat or an apartment or an independent house – any residential property) in detail.
(Do you know when the capital gain from the sale of a house is classified as long term capital gain? Please read “Long Term and Short Term Capital Gain – Income Tax Calculation” to find out)
How Inflation Affects Cost of Acquisition
Let’s say you bought a house in Jan 1989 for Rs. 2 Lakhs. You sell it in Oct 2007 for Rs. 20 Lakhs.
What is your profit?
Sounds like an odd question, right? This is something that even a 5th standard student can answer! Obviously,
Profit = Sale Price – Cost Price (or Acquisition Price)
And therefore, your profit in this case would be Rs. 20 Lakhs – Rs. 2 Lakhs = Rs. 18 Lakhs.
Well, it is in fact right. But do you think the value of Rs. 2 Lakhs in 1989 was the same as it was in 2007?
Of course not! Rs. 2 Lakhs could buy a lot more in 1989 than in 2007. The value of the Rupee decreases every year due to inflation.
So, is it right if we just subtract a price paid in 1989 from the price we obtained in 2007 to calculate the profit?
Logically thinking, this wouldn’t give us the true profit.
Fortunately, the department of income tax also thinks this way! And therefore, in the income tax rules, there is a provision of indexing the cost price in order to arrive at a price that is comparable to the sale price. (This price is called the Indexed Cost of Acquisition)
Indexation Using the Cost Inflation Index
An important concept to understand here is that of the cost inflation index.
This is a number derived for each financial year by the Reserve Bank of India (RBI), and it depends on the prevailing prices during that financial year.
The number in itself doesn’t convey much. But the change in the cost inflation index figure is indicative of the inflation during those years.
Thus, if we see the change in the cost inflation index between say 1989 and 2007, it would give us an indication of the change in prices between these years.
Or, in other words, it would give us an indication of the change in the value of the Rupee between these years.
And therefore, as you would have guessed by now, we need to use the cost inflation index for these two years to find the Indexed Cost of Acquisition.
Cost Inflation Index Table
| Financial Year | Cost Inflation Index (CII) |
| 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 |
How to find the Long Term Capital Gain
This is a simple, three step process.
Step 1: Find Indexation Factor
You need to take the cost inflation index of the year of sale, and divide it by the cost inflation index of the year of purchase to find the indexation factor.
Indexation Factor = Cost inflation index of the year of sale / Cost inflation index of the year of purchase
In our example, cost inflation index of the year of sale (FY 2007-08) is 551, and the cost inflation index of the year of purchase (FY 1988-89) is 161.
(Do not understand the difference between Financial Year, Assessment Year and Previous Year? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)“)
Thus,
Indexation Factor = 551 / 161 = 3.42236
What does this mean? This means that the prices have increased around 3.4 times between the years 1989 and 2007!
Thus, the indexation factor tells you how many times the prices have increased between the two given years.
Step 2: Indexed Cost of Acquisition
This is even simpler, and intuitive as well!
The indexed cost of acquisition is actual purchase price multiplied by the indexation factor.
Indexed Cost of Acquisition = Actual Purchase Price * Indexation Factor
Thus, in our example,
Indexed Cost of Acquisition = Rs. 2 Lakhs * 3.42236 = Rs. 6.85 Lakhs.
Step 3: Find Long Term Capital Gain
Finally, the long term capital gain is the difference between the sale price and the indexed cost of acquisition.
Long Term Capital Gain = Sale Price – Indexed Cost of Acquisition
Thus, in our example,
Long Term Capital Gain = Rs. 20 Lakhs – Rs. 6.85 Lakhs = Rs. 13.15 Lakhs.
It is that simple!
So, what do you do now? Pay the long term capital gains tax on Rs. 13.15, right?
Wrong!
Deducting Cost of Improvements
You can even deduct the various costs incurred by you for periodic repairs of the house from the sale price. And even this can be indexed!
Let’s say you spent Rs. 75,000 on repairs of the house in May 1996.
Now, for this,
Indexation Factor = 551 / 305 = 1.80656
And the indexed cost of repair = Rs. 75,000 * 1.80656 = Rs. 1.35 Lakhs.
You get to deduct even this from the sale price!
Long Term Capital Gain = Sale Price – Indexed Cost of Acquisition – Indexed Cost of Improvements
Thus,
Long Term Capital Gain = Rs. 20 Lakhs – Rs. 6.85 Lakhs – Rs. 1.35 Lakhs = Rs. 11.8 Lakhs.
Neat, isn’t it!
Please note that if you have incurred expenditure for improvement of your house multiple times in different years, you can subtract all these indexed costs of improvement from the sale price of the house.
House Purchased Before 1980-1981
The cost inflation index numbers are available starting from 1980-81.
So, how do you find the indexed cost of acquisition for a house bought before 1980-1981?
Well, this is a little tricky.
In such cases, you have to arrive at the Fair Market Value of the house as on 1st April, 1981, and then find the indexed cost of acquisition based on this price.
Please also read:
- Long Term and Short Term Capital Gain – Income Tax Calculation
- How to save / avoid Long Term Capital Gain (LTCG) Tax on Sale of a House
- “Set Off and Carry Forward of Losses – Capital Gains and House Property”
CA Mayank Tulsyan
(B.Com(H), ACA)
(274 Points)
Replied 15 September 2011
sir im well aware of these provisions.. bt my query is different........ i mean 36 months should be calculated from the time of registration of house.. or from the time when the complete payment has been paid .
Annu.R
(CA,CS,B.Com)
(2788 Points)
Replied 15 September 2011
You should clear it from clint...........the sale will be matured in parts/on part payments or in one time then we can count the same..............we should count it from purchase to sale.........paper of registrar.
If the payments counted in two years (like some in 2011 and other in 2012) and showing in bank account then we will count it on bank transation otherwise as per Registration paper.
Rajagopalakrishnan R
(PARTNER)
(1422 Points)
Replied 15 September 2011
I dont think u have any option but to take the date of purchase as the date of registration. If the flat is not yet registered then the date on whcih the agreement with builder is entered into. In no case can the firts instalment /last instalment date be taken as date of purchase
Vishal Manchanda
(Prop)
(21 Points)
Replied 15 September 2011
Yes, it will attract Capital Gains.
Date of Acqn would be the date of registration no matter the property is purchased under Loan agreement and the papers/ownership is with finance co. say a Bank.
The property is mortgated to the bank and as this house will be termed as capital asset as capital asset is property of any kind HELD by assessee.
Regards,
Vishal Manchanda
vishal_manchanda @ rediffmail.com
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