Planning to sell your House Property, Gold, Debt Mutual Funds, have a look at how Indexation can reduce your Tax Liability. Remember that Indexation can be applied only when the capital asset sold is Long Term Capital Asset. Have a look at few asset class & how they are taxed on the basis of their holding period:
Cost Inflation Index is released by Government Of India each year.
Cost Inflation Index or CII is released by Government each year. CII is released each year to adjust inflation in the buying price of the capital asset, which finally reduces the tax liability of the individual at the time of selling the asset. Let’s see how:
Following example will better let you understand how Indexation Can reduce his tax liability:
Mr. Anil purchased a flat on 3rd March 2005 for Rs.30,00,000. He is planning to sell the house on November 2012 for Rs.1,00,00,000. How much tax Anil need to Pay:
Buying Price = Rs.30,00,000
Selling Price = Rs.1,00,00,000
Profit = Selling Price – Buying Price = Rs.70,00,000
So, Anil need to pay tax on Rs.70,00,000
Now let’s see how indexation can reduce Anil Tax Liability:
Indexed Purchase Price = Purchase Price*(CII 2012-13) / (CII 2004-05)
Where CII stands for Cost Inflation Index.
From the above table:
CII for 2004-05 = 480
CII for 2012-13 = 852
So, Indexed Purchase Price = 30,00,000*(852/480) = Rs.53,25,000
Profit = Selling Price – Indexed purchase cost
Profit = 1,00,00,000 – 53,25,000 = Rs.46,75,000
So, after Indexation Anil need to pay tax on Rs.46,75,000
|Without Indexation||70,00,000||70,00,000*20.6% = 14,42,000|
|With Indexation||46,75,000||46,75,000*20.6% = 9,63,050|
It’s clearly visible that Indexation reduces your tax liability to a great extent. In this case Mr. Anil need to pay Rs. 4,78,950 less as tax if Indexation is used.
Note: Indexation can be used only when capital asset sold is long term capital asset.
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