Shifting of base year from 1981 to 2001 would save you capital gains tax

Impact of “shifting” Base year from 1981 to 2001 for Real Estate:-

At the time of sale of any asset, tax is liable to be paid on the gains earned on the sale of asset. Such gains could be either Short Term Capital Gains or Long Term Capital Gains. The basis of such classification in the Income Tax Return has been given below:-

Short Term Capital Gain (STCG): If the asset was held for less than 24 Months

Long Term Capital Gain (LTCG): If the asset was held for more than 24 Months

The classification of short term & long term capital gains and their tax rates is different in case of shares and mutual funds.

Short Term Capital Gain Tax Rate: As per normal Income Tax Slabs

Long Term Capital Gain Tax Rate: 20%.

The capital gain will be Sale Price minus the Indexed Cost based on the cost inflation index.

Expenses incurred on repairs and renovation can be added to the cost of the acquisition of the house while computing long term capital gains. Also, the interest paid during the pre-construction period of the house can be added to the cost, if not already claimed as deduction earlier.

The period of holding will be counted from the date of allotment of the property/flat to you.

In the union budget proposal presented in Feb 2017, the base year has been shifted from 1.4.1981 to 1.4.2001 for the computation of the indexed cost of the property. Also, for long term capital gain, the minimum period for which the property should have been with the owner has been reduced to two years from the earlier three years. If you bought a property in May 1991 for Rs 10 lakhs and sold it in Feb 2017 for Rs 90 lakhs, to calculate the capital gain, we have to find out the indexed cost of the property in March 2017 using the Cost of Inflation Index (CII) notified by the Income Tax Department. CII for 1991-92 is 199, CII for 2001-02 is 426, CII for 2016-17 is 1125.

Base Year 1981:

Indexed cost of the property in 2017 is 10 x 1125/199 = 56.53 lakhs.

Capital gain is 90 – 56.53 = 33.47 lakhs Tax @ 20% = 6.69 lakhs.

Base Year 2001:

Indexed cost of the property in 2001-02 is 10 x 426/199 = 21.40 lakhs.
Fair Market Value (FMV) as of 2001-02 (Base Year) is say = 30 lakhs.

Indexed cost of the property in 2017 based on FMV in 2001 is 30 x1125/426= 79.23 lakhs.
Capital gain is 90 – 79.23 = 10.77 lakhs Tax @ 20% = 2.15 lakhs.

So the capital gain tax to be paid is 2.15 lakhs instead of 6.69 lakhs due to shifting of the base year from 1981 to 2001. The CII rate is generally lower than the actual.

The fair market value can be obtained from the Registered Valuer. The land value in 2001 can be obtained from the Sub Register Office (SRO) where the land is located through Right To Information Act(RTI)-2005-1. In case the property also has a house, the same will also be calculated using the realistic market value. Expenses incurred on repairs and renovation can be added to the cost of the acquisition of the house while computing long term capital gains.

Shifting the base year from 1981 to 2001 helps to capture the inflated cost of the property much better, lowering the capital gains and the tax burden.

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