How to save capital gains tax on sale of property

Capital gains exemption

What is capital gains ?
Capital gains is amount of gain or profit on transfer of capital asset, there are different types of capital asset however we are discussing only immovable property. The difference in sale value of land or building and purchase cost is called as capital gains, capital gains calculation should be done with proper application of all rules and application of proper income tax provisions.

What is short term and long term capital gains ?
Capital gains arising on short term capital asset is called short term capital gains, capital gains arising on long term capital assets is called as long term capital gains.  classification of assets as long term or short term depends on period of holding of the land or building, if period of holding is greater than 24 months any thing below 24 months is called as short term capital asset while immovable property is concerned.

How to calculate capital gains ?
Capital gains is calculated by reducing cost of acquisition and other expenses such as brokerage , cost of improvement etc in case of short term capital asset.  Calculation will be similar in case of long term capital asset however while calculation of cost of acquisition indexation procedure is followed. Indexed cost of acquisition is  arrived by multiplying index value of year of transfer and divided by index value of relevant to date of acquisition.

How to arrive at cost of acquisition in certain cases ?
Income tax department had revised index values so index value are available only from financial year 2001-2002, so if the date of acquisition is prior to 1 st april 2001 we have an option to use fair market value as on 1 st april 2001 or original cost of acquisition. Similarly in case of cost of improvement is allowed only if incurred on or after 1 st april 2001.
Fair market value is amount the property would be ordinary sold as determined by the registered valuer. As per amendment  by finance act 2020 fair market value cannot be greater than the stamp duty value as on 1 st day of april 2001 if available.

Example:
1. Land is sold on nov 2019. (Fy – 2019-2020) @ Rs. 25,00,000.
Cost inflation index for 2019-2020 is 289.
Brokerage paid on sales 2 % Rs.50,000.
2. Year of acquisition is nov 2010 (Fy 2009-2010). @Rs. 5,00,000.
Cost inflation index for fy 2009-2010  is – 148.
Cost Inflation Index as published by Income tax department

Sale considerationRs.25,00,000.
   Less : Indexed cost of acquisition : 5,00,000 * 289/148Rs.976351.
   Less : BrokerageRs.50000.
   Less : Indexed cost of improvementRs. 0
Long term capital gainRs. 1473649.

What details we need to calculate long term capital gain .
Date of purchase , date of sale, cost of land, sale value, commission if any paid, guideline value as on the date of purchase and sale.

Exemption from eligible long term capital gains can be claimed by investment prescribed under Section 54, 54F,  54EC.
1. 54 – Long term asset transferred should be residential property , exemption is allowed for investment in residential property for whole of capital gains if total capital gain is invested. If new property value is less than 2 crores exemption can be claimed second time by the assessee.
2. 54F – Any long term capital asset other than residential house, exemption is allowed in the proportion of amount of amount of sale consideration invested in purchase of new asset.

Remaining long term capital gains after capital gains exemption will be at taxed @ 20 %. and if basic exemption limit is not exhausted by other income it shall be reduced from amount of capital gains.

Critical points to note down regarding sale of property.
1. Do not get sale consideration in cash.
2. If you are considering to purchase of construct your property to save capital gains make sure to file returns and deposit the appropriate amount in capital gains account as per capital gains account scheme.
3. Consult your proper capital gains consultant or auditor before entering in to transactions.
4. Buyer may insist for different terms which will be not suitable for proper compliance of income tax act so , it is       always advisable to take prior consultation.

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