How to Calculate Capital Gain on House Property?

5 min read
How to Calculate Capital Gain on House Property? Real Estate sector is one of the most popular sectors for investments. In this article, we will discuss the capital gain calculation for sale of house property purchased before 1st April 2001.

Capital Gain Calculation for Sale of House Property Purchased before 1st April 2001

Introduction

How to Calculate Capital Gain on House Property? Real Estate sector is one of the most popular sectors for investments. In this article, we will discuss the capital gain calculation for sale of house property purchased before 1st April 2001.

DIY Income Tax Planning
Income Tax Knowledge Bank by Tax Yadnya

How to Calculate Capital Gain on House Property?

  • Real Estate sector is one of the most popular sectors for investments. People generally tend to buy multiple properties, in order to earn a recurring income like rent or to earn the profit on sale (due to rise in real estate prices).
  • Profit on sale of the house property is taxable under the head ‘Capital Gain’.
  • Here, we have explained 3 key points :
    1. The factors to be considered while calculating Capital Gain on the sale of the property.
    2. Mode of Acquisition of the property
    3. How to calculate the Capital Gain on the sale of the house property

Factors Important for Calculating the Capital Gain on the Sale of the Property

  • There are three important factors important for calculation of capital gain :
    • Sale Consideration
    • Cost of Acquisition
    • Indexed Cost of Acquisition
  • Let us understand in each factor in detail.
  • Sale Consideration
    • Sale consideration is nothing but the sale price of the property.
    • However, Government has allowed us to claim some deductions. The expenses which are directly related to the sale of the property can be deducted from the sale consideration received.
    • The selling expenses include :
      1. Commission
      2. Brokerage
      3. Advertisement Expenses
      4. Legal Expenses
  • Cost of Acquisition
    • It is the cost price of the property which we have paid at the time of purchase / construction of the property.
  • Index Cost of Acquisition is explained in next point – Mode of Acquisition of the property.

Mode of Acquisition of the Property

  • There are 4 mode of acquisition of the property :
    1. Property is Purchased / constructed by oneself
    2. Received by way of inheritance
    3. Received by way of a Gift
    4. Received by way of a Will
  • In case of the purchase of the property,
    • Purchase price of the property + Expenses directly linked to the purchase of the property.
    • Expenses include :
      1. Payment of Stamp Duty
      2. Payment for purchase of parking lot
      3. Legal Expenses, etc.
  • In case of the Construction of the Property,
    • Cost includes –
      1. The cost of the raw material (like cost of steel, sand, cement, Tiles, Plumbing Material, Material for electronic fittings, etc.)
      2. Architect Fees
      3. Payment of fees to engineers
      4. Plan Sanction Fees
      5. And any other expenses which need to be incurred for the construction of the property
Cost of Improvement
  • If you have incurred any expenditure to improve the quality of the property which helps to increase the life of the property, it is known as ‘Cost of Improvement’.
  • To calculate capital gain, Cost of acquisition and cost of improvement should be deducted from the net sale consideration.
  • In case of long-term capital gain, indexed cost of acquisition / improvement should be calculated.
Indexed Cost of Acquisition
  • Indexed Cost of Acquisition = Cost of Acquisition + Inflation Cost
  • Acquisition cost of the property is increased according to the inflation till the date of the sale.
  • Formula to calculate the Indexed Cost of Acquisition is :
Indexed Cost of Acquisition
Indexed Cost of Acquisition Formula

The Indexed Cost of Improvement shall be calculated in the same manner.

The Cost Inflation Index Chart is given below :

Cost Inflation Index Chart
Cost Inflation Index Chart

How to Calculate Capital Gain on the Sale of the Property?

Capital Gain = Net Selling Price Less (Indexed cost of Purchase + Indexed Cost of Improvement)

How to Calculate Capital Gain on House Property?
How to Calculate Capital Gain on House Property?
Example

Mr. Shreyas sold his property in 10th February 2020. He received ₹ 2 crores on the sale of the property. He had incurred ₹ 2 Lakhs on commission and advertisement for the sale. The said property was purchased on 15th June 2012. CII of FY 2012-13 is 200 and CII of FY 2019-20 is 289. Calculate the Capital Gain on the sale of the property.

ParticularsReferenceAmount
Sale Consideration on the sale of the property(A)₹ 2,00,00,000
Less: Selling Expenses(B)(₹ 2,00,000)
Net Sale Consideration(C = A – B)₹ 1,98,00,000
Example – How to Calculate Capital Gain on House Property?
  • Indexed Cost of Acquisition = ₹ 60,00,000 x (289/200)
  • Therefore, Indexed cost of acquisition is ₹ 86,70,000. It means, Mr. Shreyas received inflation benefit of ₹ 26,70,000 = (₹ 86.70 Lakhs –₹ 60.00 Lakhs).
Long Term Capital Gain
Net Sale Consideration(A)₹ 1,98,00,000
Less: Indexed Cost of Acquisition(B)(₹ 86,70,000)
Long Term Capital Gain(C = A-B)₹ 1,11,30,000
Example – Long Term Capital Gain on Sale of Property

Therefore, Mr. Shreyas has earned a Long Term Capital Gain on ₹ 1.11 Crores.

Tax on Long Term Capital Gain

Long Term Capital Gain on the sale of the property is taxed @20%. Therefore, Capital gain tax of Mr. Shreyas will be calculated as :

LTCG as calculated above(A)₹ 1,11,30,000
Tax @20%(B = A x 20%)₹ 22,26,000
Health & Edu. Cess(C = B x 4%)₹ 89,040
Total Tax on Capital GainD = A – B₹ 23,15,040
Example – Tax on Long Term Capital Gain

If property is received by way of a Gift / Will / Inheritance

  • Base Year of CII is FY 2001-02. Generally the properties received by way of a will / Gift / Inheritance are acquired before 2001. In such case, Government has given the guidelines to decide the cost of acquisition of the property.
  • According to the guidelines, if you have acquired the property before 2001,
    • Obtain the purchase price of the property
    • Also, Obtain the Fair Market Value (FMV) of the property
  • Fair Market Value can be arrived by two methods :
    1. Obtain a Valuation Certificate from Government Approved Registered Valuer OR
    2. Refer a Ready Reckoner Rate of the property (Government publishes the same every year)
  • Fair Market Value calculated by the Registered Valuer cannot exceed the ready reckoner rate published by the Government.
  • Higher of the (1) and (2) above shall be considered as the cost of acquisition of the property.
  • Once the cost of acquisition of the property is determined, indexation should be done in the same manner.
Example

Mr. Shreyas has received a shop by way of gift from his Grandfather. The said shop was originally purchased in April 1995. Cost of the shop was ₹ 25,00,000. Government valuer has calculated the FMV of the property as ₹ 50,00,000. Ready reckoner rate is ₹ 40,00,000. Let us calculate the cost of acquisition on 1st April 2001.

ParticularsReferenceReady Reckoner Rate is availableReady Reckoner Rate is not available
Year of Purchase 19951995
Cost of Purchase in the year 1995A₹ 25,00,000₹ 25,00,000
Value as per Registered ValuerB₹ 50,00,000₹ 50,00,000
Higher of the A and B aboveC₹ 50,00,00₹ 50,00,000
Ready reckoner Rate as on 01.04.2001D₹ 40,00,000Not Available
Cost of Acquisition for the purpose of the calculation of capital gainE₹ 40,00,000₹ 50,00,000
Calculating the cost of acquisition of property on 1st April 2001 received by way of a Gift

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: