How to account for your capital gains on sale of property?

How to account for your capital gains on sale of property?


Do not ignore the concept of indexation while computing your capital gain. After you pay tax on capital gain, do not forget to report it in the right form.

Diversification of investments is one of the basic principles of investing and with the recent boom in realty market, many people have mastered the art of making good money from property transactions.


What is still unclear for some is the aftermath - How to calculate and pay the taxes on such transactions? Is there a way to avoid these taxes? How are these transactions with tax paid details to be reported while filing one’s tax returns? Let’s understand these transactions and the basics about how to calculate one’s tax liability and report the same while filing tax return. Any kind of property held by a person, whether or not connected with business or profession of that person, is called Capital Asset and any gains from the purchase and sale of such capital assets is called Capital Gains. These capital gains are taxed at special rates (not the slab rate that is applicable to individuals). To determine the applicable tax rate, these capital assets are classified into two categories:

• Long term capital assets: Any capital asset held by a person for more than 36 months before being sold, is treated as a long term capital asset. Gains from transfer of long-term capital asset will be Long Term Capital Gains (LTCG).

• Short term capital assets: Any capital asset held by a person for less than 36 months before being sold, is treated as a short term capital asset. Gains from transfer of short term capital assets will be Short Term Capital Gain (STCG).

Now let’s focus on how to calculate Long term Capital Gains:

Particulars Rs.

Full value of consideration (i.e., Sales consideration of asset) ......................................XXXXX

Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.) .................................................(XXXXX)

Net sale consideration .....................................................................................................XXXXX

Less: Indexed cost of acquisition (*).......................................................................       (XXXXX)

Less: Indexed cost of improvement if any (**) .............................................................(XXXXX)

Long-Term Capital Gains ...............................................................................................XXXXX

*Cost of Acquisition includes purchase price and expenses incurred exclusively for registering and transferring the property in your name.

** Cost of Improvement includes expenditure incurred for making any improvements or additions to the capital asset.

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, the Central Government has notified Cost Inflation Index. The Cost Inflation Index is simply the measure of inflation and you can find these on the Income Tax website.

Index cost of acquisition can be calculated with the following formula: 

 

(Cost of acquisition × Cost inflation index of the year of transfer of capital asset) / Cost inflation index of the year of acquisition

Benefit of Indexation is available in the case of long-term capital assets only. So if you have sold a short-term capital asset, the acquisition cost will be deducted from sales consideration without adjusting the same with cost inflation index.

To understand this with an example:

The value of a home in which you live, would be different in the year 2014-15 as compared to the value of that home in the year 2005 in which you bought it. So to derive the value of that home for the year 2015, it has to be adjusted using the cost inflation index as follows:

Say cost of acquisition Rs. 10,00,000 (Year of acquisition 2005-06)

Sales consideration Rs. 30,00,000 (Year of sales 2014-15)

So the indexed cost of acquisition = 

= (Rs. 10,00,000 x 1024 (Cost inflation index for the year 2014-15))/ (497 (Cost inflation index for the year 2005-06) )

= Rs. 20,60,362

Now, Capital gain = Rs. 30,00,000 (sales consideration) - Rs. 20,60,362 (Indexed cost of acquisition) = Rs. 9,39,638

Cost of improvement will also be indexed in a similar way as detailed above.

Long-term capital gains from property are applicable to 20% tax rates. Long-term capital gains will be adjusted against basic exemption limit first and the gains remaining after the adjustment will be taxed at 20%.

You can avoid taxes on LTCG by investing in another property or specified assets as per the Income Tax Act. If you have sold a residential property, then you can claim exemption under Section 54 by investing in another residential property from the sales proceeds or you could claim exemption under Section 54EC by investing in specified bonds of Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). If you have sold an agricultural land, then you could claim exemption under Section 54B by investing in another agricultural land. These investments are to be made subject to the conditions specified in the Income Tax Act. If you are unable to utilise the sales proceeds for the purchase of a new property, you can still claim the benefits by depositing the un-utilised amount in the Capital Gains Deposit Scheme account with any scheduled bank before filing the return.

Short-term capital gains will be calculated in a similar way as Long Term Capital Gains, but the benefit of indexation will not be available to the cost of acquisition and cost of improvement. This means that the actual costs will have to be deducted from the sales consideration to derive the STCG. Tax liability for STCG in case of property transactions will be calculated at the slab rate applicable to the individual.

Credit for Taxes deducted:

The Finance Budget 2013-14 introduced TDS on Payment upon transfer of certain immovable property other than agricultural land at the rate of 1% where the consideration for the transfer of an immovable property is Rs. 50 Lakhs or above, under Section 194IA of the Income Tax Act.

• All details regarding the transaction and TDS on Property are required to be furnished in Form 26QB, and the same is required to be submitted at the time of payment.

• After depositing the TDS, the buyer of the property would also be required to issue Form 16B to the Seller of the property in respect of the taxes deducted and deposited with the government.

So if you have sold a property and received the sales consideration after TDS, you can claim that TDS credit while filing your Income Tax Return.

Reporting in Income Tax Return Forms:

Individuals can report their capital gains using ITR 2, ITR 3 or ITR 4, as applicable. The Income Tax Department utilities are available for preparing such ITRs, but reporting capital gains using these utilities can be a bit of a challenge. You have to determine the type of capital gains by yourself and in case of long-term capital gains, you have to calculate the indexed costs on your own. A Chartered Accountant could come to your rescue, but may charge you anywhere from Rs. 2,000 to Rs. 5,000 for preparing your tax return, depending upon the type and number of capital gains transactions. So before you choose either of these two options, we’d recommend you to check out some of the online return filing services, which can be very easy to operate. You’d be surprised to see how easily some of these websites can handle your capital gains reporting. They can determine the type of capital assets automatically on the basis of inputs, which you have provided and would calculate your tax liability accordingly. You can achieve all this at a lesser cost than what you’d normally spend on a CA.

Happy Investing

Source:Moneycontrol.com