Long Term Capital Gains Computation with base year 2001

Published: February 3, 2017 at 8:57 am

Last Updated on

Budget 2017 has proposed a slew of benefits related to long-term capital gains. The most important is the shift of the base year to be used for long-term capital gains computation for all asset classes. Here is a summary and illustration of long-term capital gains computation with base year 2001.

1: Change in duration for computation of capital gains

Gains from the sale of immovable property (land or building) after a holding period of 2 years will now qualify for long-term capital gains. Earlier this was three years.

2: More Sectors to come under Section 54EC

The taxable long-term capital gains arising from the sale of any asset can be offset by investing (up to Rs. 50 lakh) in bonds notified under section 54EC for 3 years. The interest (~ 6%) from these bonds will be added to income and taxed as per slab.

As of now Rural Electrification and National Highways bond only are eligible. From FY 2017-18, more such bonds from other sectors will come under 54EC.

3: Base year for capital gains computation shifted

old rule: If the asset was acquired after 01-04-1981, the purchase price has to be indexed with cost inflation index computed with a base as 100 on above date.

If the asset was acquired before 01-04-1981, we could use the fair market value as on that date or the actual cost and claim a deduction for the cost of improvement incurred from above date.

new rule: If the asset was acquired after 01-04-2001, the purchase price has to be indexed with cost inflation index computed with a base as 100 on above date. (the current value is 426 and it is okay to use this too).

If the asset was acquired before 01-04-2001, we could use the fair market value as on 01-04-2001 or the actual cost and claim a deduction for the cost of improvement incurred from above date.

Will the shift to base year 2001 lower taxes?

Depends!

If the purchase was made after April 2001, then there would be no difference in the amount of tax to be paid on long-term capital gains.

Pre-budget capital gains tax computation:

If the purchase was made say, in FY 1988-89. The pre-budget rule would be to inflate the purchase price using the cost inflation index with 1981 as the base year.

Suppose we want to sell the property in July 2017, and cost inflation index for FY 2017-18 is 1159* (assumed 3% higher than FY2016-17).

*: not yet announced! Just for illustration.

Update: This is the latest cost inflation index data

The cost inflation index in 1988-89 was 161.

Then the purchase price in 1988 would be multiplied by (1159/161) or 7.2 times.

Suppose the property was purchased for 5 lakhs in 1988-89, the indexed purchase is 5 x 7.2 ~ 36 Lakhs. This is the indexed cost of acquisition.

Suppose the current sale price Rs. 75 lakhs,

then the capital gain = 75- 36 ~ 39 Lakhs.

A tax of 20% (+cess) has to be paid on this amount.

Post-budget capital gains tax computation:

The post-budget rule is to use the fair market value on April 2001 as the purchase price.

The property was purchased for Rs. 5 Lakh in FY 1988-89. To determine the fair market value in FY 2001-02, one will have to get the sale record from registration office or consult an approved valuer.

Fair market value estimation is often guesswork and if one uses an unrealistic value, the ITO may call for a scrutiny.

Now, suppose I assume the value of the price increases like the cost inflation index, then the market value in 2001-02 would be ~ 13 Lakh**

**: CII in 1988-89 = 161; CII in 2001-02 = 426.

So 5 lakh x (426/161) ~ 13 Lakh. Or in other words, property has increased year on year at a rate of about 7.8%.

If the fair market value as on Apr 2001 is equal to this 13 Lakh, then there would be no change in the amount of tax to be paid post-2017 budget.

If property prices have increased at a rate higher than the CII (a very realistic possibility) then the amount of tax to be paid post-2017 budget would be lower.

For example, assuming prices have increased year on year at 10%, the fair market value in FY 2001-02 would be 5 lakh x (1+10%)^13 ~ 17 Lakh.

Now the CII in FY 2001-02 is 426.

The (assumed) CII in FY 2017-18 is 1159

So the indexed cost of acquisition is 17 lakh x (1159/426)  ~ 47 lakh.

This is higher than the pre-budget calculation by about 11 lakh.

Remember the current sale price Rs. 75 lakhs.

So the capital gains = 75 – 47 = 28 lakhs.

A tax of 20% (+cess) has to be paid on this amount. A tax saving of about 2.2 Lakh.

Summary

It the purchase was made after April 2001, then there is no change in LTCG tax.

If the purchase was made before April 2001 and the property price grew at a rate greater than the cost inflation index from the date of purchase to April 2001, then post-budget there would be a reduction in tax to be paid.

Post-budget here implies after the passing of the finance bill 2017 and from 1st April 2017 onwards.

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