Planning to sell an old asset? Ace the base year regime and reduce your tax outgo
NEWDELHI: If you own assets such as real estate, jewellery or bullion bought before 2001, and are planning to sell them, chances are that the tax liability on any resulting capital gains will come down. That’s because the finance minister, in the budget for 2017-18, has proposed to move the cost inflation index (CII) base year from 1981 to 2001. This should bring down the long-term capital gain (LTCG) tax for sellers on assets acquired before 2001. A look at how that will happen.
CAPITAL GAINS
Profits arising from the transfer of assets, including property, gold, shares or bonds are considered capital gains, and taxed as such. Capitals gains from transfer of shares before one year is considered a shortterm capital gain (STCG) and taxed at 15.45% (including cess). Gains from shares transferred after a year of holding are categorised LTCG and exempted from taxes. In real estate, gains from transfer of property within three years of purchase are deemed STCG and after three years LTCG.
BASE YEAR
In order to calculate the LTCG, the property seller should calculate the indexed cost of acquiring the property. To arrive at the indexed cost, the seller has to multiply the purchase cost of the property he owns with the CII — as notified by tax authorities in the year of sale. This number has to be divided by the CII in the year of purchase. The CIIs can be found on www.incometaxindia.gov.in.
However, in cases where the property was bought before the CII base year, one needs to know the fair market value of the property for the base year. Consider the example of a person who may have bought a property for ₹1 lakh in, say 1975, and is planning to sell it now. If we assume that property prices have appreciated at the rate of 15% per annum, then the fair market value of the property bought in 1975 would be ₹2.31 lakh in 1981. Based on this, the current indexed cost of the property would be ₹26.02 lakh. The calculation is: ₹2.31 lakh *(1125/100). Here, 1125 is the CII for 2016-17 and 100 is the CII for 1981-82. If the property is currently selling at ₹1.5 crore, the capital gain would be ₹1.24 crore, and LTCG tax would be ₹25.54 lakh.
With the proposed change in the base year, from the next financial year, one would have to calculate the fair market value of the property in 2001. The shift in the CII base year from 1981 to 2001 will change the final capital gains from the property. This is so because, “property prices appreciated at a much higher rate between 1981 and 2001, compared to the increase in CII,” said Amit Maheshwari, managing partner, Ashok Maheshwary & Associates LLP. So, the property valued at ₹2.31 lakh in 1981 would be valued at ₹9.84 lakh in 2001. ₹2.31*426 (CII 2001-02)/100 (CII 1981-82).
On the other hand, if we assume that the property price appreciated at a high rate of, say 15% per annum during the same period, then the fair market value of the property would have been about ₹37.86 lakh in 2001. The inflated cost of acquisition at present would be about ₹99.97 lakh (₹37.86*(1125/426)). In such a case, the LTCG would be around ₹50.03 lakh, and the tax liability would be ₹10.3 lakh. This means that the shift in the base year would result in savings of ₹15.24 lakh (₹25.54 lakh minus ₹10.3 lakh) if you decide to pay tax on the LTCG.