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Across Mumbai, several families are looking towards the redevelopment of their old tenanted property whereby they get a chance to move into a larger apartment with modern amenities. These properties have been granted higher floor space index (FSI), which is why developers are queueing up amid the lure of high returns.
These dream homes, however, have one grey area: how does one calculate the capital gain in such a case, and the tax thereon? With redevelopment of such properties being touted as a solution for renewing urban spaces, this is an issue that could confront a large number of families across the country.
“It is calculated when a capital asset — in this case the residential property — is transferred. The transfer includes sale or exchange of property or relinquishing rights to it. If the property is held for less than three years, the gain is short-term and if it is held more than three years then it is long-term,” according to Vinod Sampat, an advocate and property expert.
Let us suppose a buyer bought a flat in in 2001 at Rs 40 lakh. He sold the flat in 2011-12 at Rs 86 lakh. In this case, the capital gain is not Rs 46 lakh (the gain from the transaction), for the buyer has not factored in cost indexation.
This concept applies only for computing long-term capital gain. In the above case, the value is Rs 12,29,108 and not Rs 46 lakh (see box), and the capital gains tax is charged at around 20 per cent of this amount. How?
Since the time gap between sale and purchase is over three years, indexation comes into play. The government has declared a year-wise table of Cost of Inflation Index (CII) to adjust original purchase or sale cost as per the inflation presumed in that year of purchase or sale. This CII table is available with professionals such as chartered accountants, valuers, advocates etc.
This index has been computed taking the financial year 1981-1982 as the base year, at which the index has a value of 100. Properties purchased before this year will also