It’s been 2 years since you bought that house. Now, you badly want to sell it and make some money. Your friend has offered you a great deal. It’s time to sell the house and make a good profit. But, there’s a small problem. It’s a 3 letter word called TAX. If you sell your house within 3 years, the profits you earn are called short term capital gains or STCG. These profits are added to your taxable income and you are taxed, depending on the income tax slab you fall under.
Now, this is a lot of money in tax. You just can’t give all your hard earned money to the Government. But, you cannot wait for a year to sell your house. This is where the Finance Minister helps you. The Finance Minister, Arun Jaitley, has proposed a new change where the sale of a house/property can qualify for LTCG benefit after just 2 years.
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If you sell your house within 3 years, your gains are called short term capital gains or STCG. STCG is added to taxable income and taxed depending on your tax bracket. Let’s understand this tax with a simple example. You have a taxable income of INR 12 Lakhs a year. You fall in the 30% tax bracket. You sell your house within 3 years of buying and earn a profit of INR 15 Lakhs called STCG. You have to pay a tax of 30% on your profit, which is INR 4.5 Lakhs (not including cess). This is a lot of money in tax.
If you sell a house after 3 years, your gains are called long term capital gains or LTCG. LTCG is taxed at just 20%, with indexation benefits. What is the indexation benefit? Indexation considers the effect of inflation and then adjusts the purchase price of your house, so that historic cost of purchase is adjusted to today’s value, helping you to save taxes. A higher purchase price means you pay less taxes.
The Government understands that you might buy a house this year and sell it after a few years. In this process, Inflation (the general rise in prices of goods and services with time), destroys the value of your money. What costs INR 100 today might cost INR 140, say in 5 years time. If you sell this product for INR 150 after 5 years, your gain is actually INR 10 (INR 150 – INR 140).
Let’s say you want to sell ancestral property, which was bought in 1980 for INR 2 Lakhs. You sell this property for INR 30 Lakhs in May 2015. How much tax do you pay? The Income tax department has made a chart called CII (Cost of Inflation Index), which helps you calculate long term capital gains by adjusting inflation. Take a look at the chart:
The base year of this chart is April 1, 1981 and CII is 100. Even though your property was purchased before April 1, 1981, the cost of inflation index for the purpose of acquisition is taken as 100. Let’s see how LTCG is calculated on this property.
The long term capital gain can be calculated as:
Cost of acquisition / purchase = INR 2 Lakhs.
Cost of inflation index of the year of transfer (2015-16) = 1081
The property was sold in May 2015. CII = 1081 (You get this from the CII Chart).
Cost of inflation index of the year of purchase (1981-82) = 100
The property was purchased in 1980, but you take the base year as April 1, 1981.
CII = 100 (You get this from the CII Chart).
The indexed cost of property = Cost of purchase * CII in year of transfer / CII in year of purchase.
The indexed cost of property = 2,00,000 * 1081 / 100 = INR 21,62,000.
LTCG = Selling price of the house -- Indexed cost of property
LTCG = INR 30,00,000 - INR 21,62,000 = INR 8,38,000.
Tax on LTCG @20% = INR 8,38,000 @ 20% = INR 1,67,600. You have to pay LTCG Tax of INR 1,67,600.
The Finance Minister has made a proposal to shift the base year of indexation from April 1, 1981 to April 1, 2001. This should reduce your capital gains tax liability to a large extent.
This Budget has been great for affordable housing. Housing affordable has been given Infrastructure status. A lot of money is going to flow into affordable housing. With improving LTCG tax benefits on selling a house after Budget 2017, life couldn’t be better.
Be Wise, Get Rich.
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