Investments in real estate are among the most popular. In addition to living in it, you can rent it out or resell it in the future.  Property that has been owned for more than two years is regarded as Long Term Capital Assets, and gains from its sale are long term capital gains (LTCG). Selling a property will result in a 20% capital gains tax.

To understand LTCG, make yourself familiar with the following terms:

• The full value consideration refers to the price you would receive when your house property or Capital Asset is sold. The tax on capital gains is imposed during the year the asset was transferred, even if there is no consideration.
• The Cost of Inflation Index (CII) calculates the estimated year-on-year increase in the value of an asset due to inflation. It is an important factor when calculating the LTCG. Using this method, you can determine the Indexed cost of improvement and acquisition.
• Cost of Acquisition – This refers to the price you would have paid when you purchased the property.
  • Indexed Cost of Acquisition = Cost of acquisition * Cost of acquisition in year of sale/ Cost of acquisition in year of first purchase.

• Cost of Improvement – You may have incurred costs to make changes or improvements. The cost of improvements made prior to April 1, 2001, will not be considered.
  • Indexed Cost of Improvement = Cost of improvement*CII of the year when the asset is sold/CII of the year when you purchased it for the first time.

• An expense on transfer is any cost you incur either directly or indirectly when transferring the property. It includes brokerage fees, registration costs, stamp duties, legal fees, etc.

You can lower your capital gains by indexing the acquisition and improvement to match inflation.

How to arrive at the LTCG?

A capital gain is the profit you make when you sell a capital asset. When your house property is held by you for more than two years, the capital gain on sale is considered a LTCG. The LTCG is calculated as follows –

Full Value of Consideration

Less Indexed cost of acquisition

Less Indexed cost of improvement

Less Exemption under Sec 54/B/D/EC/ED/G/G

Your LTCG amount should be included in your income when filing your tax return.

Having the final value less than the original purchase value equals a loss that is deductible from your income.

An investment in real estate offers both a chance to secure your future and to generate passive income. You do not plan for maximum tax efficiency in order to optimise your capital gains. Seek assistance from our experienced financial advisors today.