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‘Capital gains’ is one of the income heads, under the Indian tax laws. Any profit from the sale of a capital asset, is taxed under the head ‘capital gains’.
Holding period as the basis of taxation
For the purpose of levying tax on capital gains, all capital assets are divided into two categories, based on their holding period. In case the asset is held beyond a certain specified period, profits earned on such sale are treated as long-term capital gains, else it becomes taxable as short-term capital gains. For land and buildings, the holding period requirement is 24 months, for any asset to qualify as long term. However, any rights other than the ownership right, with respect to land and buildings, becomes long-term only if it sold after holding the same for more than 36 months. For example, if you sell an under-construction house, which can neither be categorised as land or building, the same becomes long-term, if it is held for more than 36 months on the date of sale. Any short-term capital gain is clubbed with your other income and taxed at the slab rates applicable.
Computation of holding period in case of inheritance or gift
Computing the holding period is simple, if the property is acquired by you. However, if the property is received as gift or as inheritance, it is not from the date on which you became the owner that the holding period is calculated, but the same is calculated from the date on which it was acquired by any of the previous owners who had paid for it. So, if you inherit a property from your father and your father inherited the same from your grandfather, who had purchased it, then, the holding period shall begin from the date on which your grandfather had become the owner of the property.
Computation of holding period for an under-construction property
There are no clear provisions, for calculating the holding period of an under-construction property that you had booked with a builder and which is sold after taking possession. Judicial opinion is also divided on this matter. If the rights in an under-construction house property are transferred before taking possession, the holding period shall be counted from the date of booking. However, if the property is transferred after taking possession, the holding period should be counted from the date on which you took possession, to avoid any litigation. This is because the law does not provide for combining the holding period of an under-construction property with that of a ready house. Before taking possession of the house what you owned was not a house but a right to acquire a house, which is different from the asset – i.e., a house which comes into your possession after completion of construction. However, if such a property is acquired or inherited by you before April 1, 2001, you have the option to substitute the fair market value of the asset, as on that date, for your cost of acquisition.
Computing the cost
All costs like brokerage, stamp duty, registration charges, transfer fees, etc., paid by you with respect to the property being sold, shall be treated as part of the cost. Moreover, any expenditure incurred subsequently, for improvement of the property, is also eligible for deduction as ‘cost of improvement’.
Benefit of indexation
In case the holding period is more than 24 months, you can enhance your cost of acquisition for computing the taxable long-term capital gains, with the help of indexation. Your original cost of acquisition and cost of improvement is indexed with reference to the ‘cost inflation index’, notified by the government for that year. This is based on the 2001 base value of 100 and is notified every year since 2001. So, for assets either acquired during 2001-2002 or for which the fair market value as on April 1, 2001, is taken as the cost of acquisition, the base is 100 and it goes up year after year. For the financial year 2018-2019, it was 280. So, for computing the long-term capital gains, the indexed cost of acquisition of the property is reduced from the net sale consideration. In case the property was acquired after April 1, 2001, the indexed cost of such property is computed by multiplying the original cost of acquisition by the cost inflation index of the year of sale and dividing the same by the cost inflation index of the year of acquisition of the asset.
So, if the house property was purchased in 2001-2002 for Rs 1 lakh and was sold for Rs 5 lakhs on March 15, 2019, the indexed cost for long-term capital gains purpose shall be Rs 2.80 lakhs and the taxable long-term gains shall be Rs 2.20 lakhs. Like your original cost, you are entitled to index your cost of improvement, as well, from the year in which the expenditure for improvement was incurred by you.
(The author is a tax and investment expert with 35 years’ experience)