Tax Query: Capital gains tax can be reduced with different exemptions

I purchased a residential flat for Rs 2.75 lakh in the year 1989. Now I am selling the same for Rs 55 lakh. I am 65 years old and qualify as a senior citizen. How much taxes do I have to pay on the capital gains? Is there any way I can save or reduce my tax? 

Any immovable capital asset held for more than 24 months is considered to be a long-term capital asset. Since you had purchased the flat in 1989 and sold it in 2020, it is a long-term capital asset. When a long-term capital asset is transferred (sold), the resulting figure is long-term capital gains (LTCG) or loss (LTCL). 

To calculate the amount of taxes on the capital gains earned, you need to be aware of the fair market value of your flat as on the 1st of April 2001. This amount will be adjusted with the inflation using the cost inflation index (CII) of FY 2019-20 which is 289. The indexed cost of acquisition will be deducted from the net sale proceeds (sale after adjusting any brokerage or other expenses directly connected to sale). In case of any positive amount, 20% tax will be applicable (plus surcharge and cess). If the calculation results in a loss, the same will be set off against another LTCG or carried forward to the future years.

Also Read: Tax Query: Interest From NRE FD Account Not Taxable for an NRI

Here’s the calculation for the capital gains after considering the senior citizens’ basic exemption limit of Rs 3 lakh: 

Particulars Amount (in Rs)
Full value of consideration 55,00,000
Less: Indexed cost of acquisition (purchase value adjusted with CII)

[2,75,000*289/100]

7,94,750
Capital gains earned 47,05,250
Tax on such capital gains (including health & education cess)  9,16,292

There are certain capital gains exemptions available under the income tax provisions that can help you save your taxes. You can reinvest the capital gains earned under the following sections and avail the capital gains exemption.

  1. Section 54 – Purchase of a new house residential house property
  2. Section 54EC – Investment in specified bonds issued by NHAI or by Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf 
  3. Section 54GB – Equity shares of an eligible startup

You can read more about the eligible capital gains exemptions here.

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in

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