The purchasing power of money (the amount of products that one unit of money can buy) decreases when the price of goods rises over time. Due to inflation, if two units of products could be purchased for Rs 100 today, just one unit could be purchased for Rs 100 tomorrow. The Cost Inflation Index (CII) is a tool for estimating inflation-related increases in the cost of goods and assets over time.
What is the location of my CII?
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- Calculation of the index acquisition cost = Purchase price of the property x CII of the financial year in which the property was sold / CII of the property’s purchase year
What is the cost inflation index for the 2020-21 fiscal year?
In a statement dated June 15, 2021, the Central Board of Direct Taxes (CBDT) announced the cost inflation index (CII) for FY 2021-22 as 317. CII was notified as 301 for the prior fiscal year, FY 2020-21. The CII is used to compute an asset’s inflation-adjusted cost price.
How is the cost inflation index for FY 2020-21 calculated?
You will pay the taxes on these gains when you file your income tax returns (ITR) for FY 2020-21. (AY 2021-22). (CII of the year of sale/CII of the year of purchase) * Actual cost price is the formula for calculating inflation-adjusted cost price.
How can you figure out the Ltcg on a home sale?
Long-term capital gain = Final Sale Price (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition, where indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition, where indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the
How may I reduce my property’s capital gains tax?
If you are unable to build a house immediately after receiving a capital gain (but intend to do so in the near future), you can deposit the profit in any public sector bank under the Capital Gains Account Scheme (CGAS). If you do this, you’ll have three years to get your ducks in a row and start building your property. If this is not the case, the capital gain will be taxed as a long-term capital gain (at 20 percent plus a 3 percent cess).
There are two types of accounts available under the CGAS scheme: savings deposit accounts (also known as Type-A accounts) and term deposit accounts (called Type-B accounts). There are two types of interest in Type-B accounts: cumulative and non-cumulative. You can move money between the two accounts by paying the fixed fees, but you can only withdraw money from Type-A accounts if you sign a statement stating that the funds will be used to build a home within 60 days. Any money that have not been used must be re-deposited.
If you’ve sold land and want to save money on taxes, you can invest in certain financial assets to protect your hard-earned capital gains from being taxed under Section 54EC of the Income Tax Act of 1961. You must invest in notified bonds within 6 months after the transfer to do so.
The Rural Electrification Corporation and NHAI, in particular, are the issuers of the bonds (the National Highways Authority of India). If you transfer or accept a loan against these bonds within three years, you will be assessed capital gains tax. Keep in mind that per financial year, you can only deposit Rs.50,000 in these bonds.
Unless it is within the bounds of (or up to 8 kilometers away from) a municipality, municipal corporation, town committee, cantonment board, or any other civic entity with a population of (or over) 10,000, the sale of farm land is not subject to capital gains tax.
FAQs on Capital Gain Tax on Sale of Property
Yes, NRIs who sell their property in India would have to pay capital gains tax. The amount of tax due will be determined by whether the gain is long or short term.
Short-term capital gains will be taxed according to the income tax slab rate. You will have to pay an applicable capital gain tax based on your annual income.
Long-term capital gains tax, on the other hand, will be 20.8 percent with indexation.
You can reduce capital gains tax on your property in a variety of ways, including:
- Setting off all of your capital gain losses is one of the most effective ways to reduce capital gains tax. You can put your capital gain profits against your losses, but your losses must trace back to a previous date. You can also match your short-term capital losses to short-term gains and your long-term losses to long-term gains. You can deduct your long-term losses from your long-term gains if you carry them forward for eight years. You must, however, file your taxes on time before the deadline.
- Investing in a Capital Gains Account Scheme is one option to reduce your capital gains tax (CGAS). This plan is designed for those who are unable to purchase a new home before filing their tax returns. The investment period in this scheme is three years. This permits you to save money in order to buy a home of your own. However, you must enroll in this program before filing your income tax returns. It’s important to know that just a few Indian banks are authorized to allow their customers to invest in CGAS.
- Investing in bonds within six months after selling a home and getting the benefits is one approach to reduce your capital gains tax. Section 54EC of the Indian Income Tax Act, 1961 allows you to claim a tax deduction for bond investments. However, you must commit to investing in these bonds for at least three years. It is recommended that you do not invest for more than three years because you will not receive any interest and will not be able to transfer the bonds to anybody else.
What does it cost to index?
- Indexation is the process of altering a price, wage, or other value depending on changes in another price or a price index.
- Indexation is used to account for the effects of inflation, cost of living, and input prices over time, as well as to account for differences in prices and costs between geographic areas.
- In inflationary conditions, where failing to negotiate regular salary increases would result in persistent real wage decreases for workers, indexation is frequently employed to raise wages.
What is the improvement index cost?
Full value consideration (cost of acquisition + cost of improvement + cost of transfer) = short-term capital gain.
The following formula should be used to calculate the amount of long-term capital gains tax that must be paid:
Long-term capital gain = (indexed cost of acquisition + indexed cost of improvement + cost of transfer) full value of consideration received or accruing, where:
Cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.
Cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement = indexed cost of improvement.
The method for calculating capital gains differs from year to year. Individuals are taxed at a rate of 20.6 percent on long-term capital gains (including education cess). Under capital gains tax, there are no deductions available.
Short-term capital gains tax is imposed according to the individual’s tax bracket.
Long-term and short-term capital gains tax rates differ in the case of shares and stocks. The following is the capital gains rate for the fiscal year 2016-2017:
Short-term capital gains on debt mutual funds are taxed according to the individual’s income bracket.
Long-term capital gains on debt mutual funds are taxed at a rate of 20% if indexation is used, and 10% if indexation is not used.
Finance Minister Nirmala Sitharaman announced the imposition of a long-term capital gain tax on equity shares sold for more than Rs.1 lakh beginning February 1, 2020. According to the Union Budget 2020, the capital gains rate is as follows:
Long-term capital gains on stock are taxed at a rate of 10%, with no indexation advantage.
The provisions governing long-term capital gains (LTCG) on the sale of equities in the Interim Budget 2020 remain unchanged.
What is the purpose of Section 54 of the Income Tax Act?
If the capital gains from the sale of a residential property are invested in the acquisition or building of a residential property, an individual or HUF can benefit from tax exemptions under Section 54 of the Income Tax Act.
What is the CII base year?
When computing long-term capital gains, CII is employed. When calculating capital gains, the CII for the year you bought the asset and the year you sold it is taken into account. For capital gain purposes, the cost after indexing is subtracted from the sale price. As a result, the capital gains tax is decreased.
The benefit of cost indexing, on the other hand, is only attainable in the case of a long-term capital gain. If the asset was bought before April 1, 1981, the cost inflation index for 1981-82, i.e. “100,” should be used as the CII for that year. If you improved the asset, you must update the cost inflation index by multiplying it by the CII of the year in which the improvement was made.
Cost after indexing = Cost before indexing * CII (sale year/purchase year)
The base year for CII was changed in Budget 2017 from Financial Year 1981-82 to Financial Year 2001-02. The new CII is effective for the 2018-19 assessment year and following years. As a result, the old CII will be used for the 2016-17 fiscal year.