BANGALORE: Capital gains arise when a house is sold. Capital gains tax is leviable on the sale or transfer of a house. It is computed on the indexed cost of the house sold. This cost is deducted from the amount received by the seller. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.
The indexed cost is the purchase price multiplied by the Cost Inflation Index (CII) for the year of sale divided by the CII for the year of purchase. The CII is published by the Income Tax Department with 1982 as the base year. The capital gain is the selling price minus the indexed purchase price.
You can reduce the capital gains tax by complying with the provisions specified under the Act. The benefit is available only to an individual and a Hindu Undivided Family.
Theproperty transferred should be a house. The income from that house should be chargeable to tax under the head ‘Income from House Property’. The house must have been held for a period of more than 36 months before the date of sale or transfer. The house may be self-occupied or rented out. Immovable properties, although owned by an individual, are not eligible for this exemption.
In order to reduce or avoid liability to pay capital gains tax, you should have purchased a house within one year of the sale or transfer, or should do so two years after the date on which the transfer took place. You can also construct a house within three years after the date of transfer to avoid this tax.
As such, in case the amount of capital gains is greater than the cost of the house bought or constructed, the difference between the capital gains and the cost of the new house will be charged to the income of the previous year. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new house, the cost will be nil.
Further, in case the amount of capital gains is equal to or lesser than the cost of the new house, it will not be charged to tax at all. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new house, the cost will be reduced by the amount of capital gains.
The amount of capital gains not appropriated towards the purchase of a new house bought one year before the date of transfer of the original house, or not used to buy or build a new house before the date of furnishing the returns of income, should be deposited in a specified bank in a Capital Gains Account Scheme.
Short-term capital gains are added to the person’s income and exposed to normal income tax slabs.