Saturday, April 28, 2018

How to Calculate Long Term Capital Gain on Property/House Sale With Indexation Example.

Yes, both NRIs and Resident can remit the money obtained by selling properties in India, but you have to take a couple of things in your mind. For example, the sale proceeds amount must be deposited into NRO account, it cannot be deposited into NRE account. Similarly, you may be liable to pay the short term or long term capital gains while selling the property situated in India. If you are selling the property within 3 years of purchase then you need to pay short-term capital gain and if you are selling the house after 3 years then you have to pay long-term capital gains I India. In case you have inherited the property then the date of purchase and price of purchase of the previous owner will be used for calculation.


The long-term capital gains are taxed @ a rate of 20% while short-term capital gains are taxed at the applicable income tax slab rates for the NRI. Long-term capital gain on property sale is not easy to calculate because you need to first calculate the indexation factor, which is the CII of the year of the sale divided by the CII of the year of purchase.

Once you calculate the indexation factory, you can calculate the indexed cost of property purchase. The long-term capital gain is the difference between the indexed cost of purchase and the sale price.

For example, if you have bought the property in 10 lakh in the year 2005 and now selling it on 50 lakh, then here is the formula for calculating the long-term capital gain on your property sale:

Cost Inflation Index, CII= Index for financial year 2016-17/Index for financial year 2005-2006 = 1125/480 = 2.343

Indexed cost of purchase = CII x Purchase Price = 2.343 x 10,00,000 = 23,43,000

Long-term capital gain = Selling Price – Indexed cost = 50,00,000 – 21,30,000 = Rs. 26,56,250

Tax on capital gain = 20% of 26,56,250 = 5,31,250



Here is one more example, of how long-term capital gain taxes are calculated using indexation:

Suppose you purchased a plot of land in 2007 for Rs.20,00,000, which you sold in 2011 for Rs.60,00,000. What will be the actual profit you made on this sale? 40 lakhs? No, lower than that, let's see how it works

How to Calculate Long Term Capital Gain on Property/House Sale With Indexation Example.


So, your actual profits after selling the property are not Rs. 40,00,000. It is only Rs. 33,57,531. This is the amount you need to consider for calculating your taxes. The long-term capital gain would be 20% of that amount because you sold the property after 3 years i.e. Rs 6,71,506.

So, you can see that calculation of long-term capital gain on property sale is not that straight-forward and it depends upon Cost Inflation Index. Here is the full list of CFI.

The cost of inflation index (CII) has been notified by the Central Government every year by notification in the Official Gazette. The cost of acquisition/improvement will, thus, be indexed with reference the rate of application for the relevant year. The Cost of Inflation Index is mainly used to compute Long-term capital gain.

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