With tax planning high on a tax-payer’s list, here’s a list of things to keep in mind when calculating Long Term Capital Gain (LTCG) and ways to save more.

 

The financial year is nearing completion soon, so tax planning should be high on your priority list now. When you sell property, profit earned on such transactions could be either short term or long term in nature. In both cases, such transactions are liable to be taxed, which could be at the prescribed slab rate applicable for the individual if it is Short Term Capital Gain (STCG), and 20 percent with indexation if it is Long Term Capital Gain (LTCG). There is no particular way to save tax on STCG, but there are a few ways you can do so with LTCG. Here, we will explain how LTCG is calculated and ways to save tax on it.

 

 

How is LTCG tax calculated?

 

Navin Chandani, Chief Business Development Officer, Bank Bazaar explains, “A realized capital gain occurs only when you sell the asset at a higher price than its original purchase price. LTCG takes the Cost Inflation Index (CII), commonly known as indexation, for acquisition as well as improvement into account:

 

Long-term capital gain = Full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of the improvement + cost of transfer), where:

Indexed cost of acquisition = cost of acquisition X cost inflation index of the year of transfer/cost inflation index of the year of acquisition.

 

Indexed cost of improvement = cost of improvement X cost inflation index of the year of transfer/cost inflation index of the year of improvement.

 

Indexation factors in the inflation rate while calculating profits earned on sale of assets. This is important as it rationalizes the gain and gives a more reasonable figure for long-term capital gains.”

 

 

A LTCG tax calculation example:

 

Let’s assume you bought a plot of land for Rs 10L in 2008. After 10 years, in January 2018, you sold off this land for Rs 30L.

 

Cost Inflation Index, CII= Index for financial year 2017-18/Index for financial year 2007-2008 = 272/129=2.11

 

Indexed cost of purchase = CII x Purchase Price = 2.11 x 10,00,000 = 21,10,000

 

Assuming you have not undertaken any major repairs during this time, LTCG would be calculated as follows:

 

Long-term capital gain = Selling Price – Indexed cost = 30,00,000 – 21,10,000 = Rs.8,90,000

 

Tax on capital gain = 20% of 8,90,000 = Rs.1,78,000

 

 

 

Ways to save LTCG tax on property

 

Ramratthinam S – CEO, Muthoot Homefin (India) Limited points out, “One can claim exemptions following sections: Sec 54 – Sell a residential property and invest the gains to buy a new residential property and claim exemption on capital gains tax; Sec 54EC – Sell a long-term capital asset and get capital gains tax exemption by investing in 54EC Capital Gain Bonds usually issued by the REC and NHAI; Sec 54F – Sell any asset other than a residential property and claim capital gains tax exemption by purchasing a residential house; Park your capital gains amount in capital gains account in case you are unable to purchase a property before your Income Tax filing date.”

You are allowed to set off your capital gains against any capital loss carried forward from previous years.

 

 

Things to keep in mind when planning to save LTCG tax

 

Experts say that capital gains are computed on the basis of the valuation adopted by the state’s stamp duty and registration authority. The tax authorities may object if the actual sale value is lower than the valuation of the property by the state authority.

 

“It is important for the seller to ensure that they utilise the proceeds deposited in the Capital Gains Deposit Account within the time specified under the Act, in order to claim exemption. Failure to utilise it shall lead to treatment as income of the person in the year in which the requisite time expires, and the seller shall be chargeable to LTCG in that year. The above shall hold good, even in cases where the newly acquired/ constructed property or the investment in bonds of NHAI or REC are disposed off within the lock-in period of three years,” suggests Mitesh Jain, Partner, Economic Laws Practice.

 

If you are unable to find a property worth buying, or the property you shortlisted would be ready only after a specified time period, you can deposit the gains from the property in Capital Gains Account Scheme (CGAS). You will have to reinvest the amount in the purchase of a residential property within two years, or for construction of the same within three years, advises tax experts.