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
Result:
| Indexation | Profit | Tax |
| 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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Do i need to pay tax @20.6% on profit or on selling price. Also please make it clear that what happens if i sell the flat within 2 years of purchase. How much tax do i need to pay then.
You need to pay tax on profit. In case you sell before 3 years, profit will be added to your income & taxed accordingly.
My husband is planning to transfer a house in my name. I will get approx 5 lac rent from it in a year. Some people say that this income will be mine. Is that true.
Clearly it seems like your husband is transferring the House in your name to avoid tax. In this case clubbing of income will take place. This 5 lac will be treated as his income & he has to pay tax.
If i purchased the house on 20 jan 2000. What will be CII.
CII for Financial year 1999-2000 will be 389
Good one. I know that if someone sells a house & purchase a house again, he need not to pay tax. Can he sell one house & purchase two house out of money received by selling the 1st house. Please suggest.
Yes he can
Must say, very well written. Say i puchased a flat on 15th march 2007 for Rs.100 & i sold it on 15th december 2012 for Rs.1,000. How much tax i need to pay. what i know is i need to pay tax @20% on profit ie on Rs.900. Correct me if i am wrong.
Your way of calculation is wrong. Let’s see how it is calculated:
CII for 2006-07: 519
CII for 2012-13:852
Indexed cost of acquisition = 100*(852/519)=Rs.164
Profit = Selling Price – Indexed cost of acquisition
Profit = 1000 – 164 = Rs.836
So you need to pay tax @ 20.6% on Rs.836 & not on Rs.900 🙂