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Indexation

By   /   June 2, 2013  /   10 Comments

IndexationPlanning 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:

 

LT-ST-CG PIC

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

www.financialkundali.com

www.financialkundali.com

 

Recommended Articles For You:

1. Financial Kundali For You

2. How to Calculate Tax

 

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About the author

Hi My name is Hari Om Tripathi. I am an engineer by chance & a Personal Financial Planner by choice. Currently residing in Kanpur & writing full time for Financial Kundali. In case you have any query about Personal Financial Planning such a buying a MF or ULIP, going for a life insurance plan or a term plan, to surrender your policy or not or any other questions related to your Personal Financial Planning, write to me at financialkundali@gmail.com

10 Comments

  1. Apporva Tripathi says:

    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.

  2. Mini Tandon says:

    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.

  3. Balvinder says:

    If i purchased the house on 20 jan 2000. What will be CII.

  4. Nishant Pandey says:

    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.

  5. Vikas yadav says:

    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 🙂

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