Capital gains tax liability on sale of house property

We recently received a query from Anuradha Pathak regarding the capital gains tax liability she would have to face upon the sale of her flat. Anuradha says she plans to sell the flat for Rs 40 lakh. According to her, the flat was constructed in 2002 and she lived in it till 2014. Once the sale is done, Anuradha plans to distribute the money among her sons.

Let’s solve her queries and use her example as a case study to help everyone understand the capital gains tax liability on the sale of house property.

Since Anuradha hasn’t mentioned the purchase price of the flat, we will assume it to be Rs 10 lakh for the sake of calculations. Now, while calculating capital gains, the cost price can be indexed as per the purchase year’s cost inflation index (CII). The formula to arrive at an inflation-adjusted cost price is:

Cost price [multiplied by] CII for sale year [divided by] CII for purchase year

The CII for 2002-03 is 447 and that for the current financial year 2015-16 is 1081. Hence, the inflation-adjusted cost price for Anuradha’s flat at the assumed purchase price of Rs 10 lakh would be:

Rs 10 lakh [multiplied by] 1081 [divided by] 447 [equals to] Rs 24,18,345

For the sake of simplicity, we will round off the indexed cost price to Rs 24 lakh. Hence, when she sells the flat for Rs 40 lakh, her capital gains would be Rs 16 lakh. She would have to pay capital gains tax on this amount. Gains on house property that is held for more than 3 years qualifies as long-term capital gains and is subject to tax at the rate of 20%.

She can reduce her tax liability by deducting expenses that are made towards brokerage or commission paid to make the sale, cost of stamp paper and travelling expenses incurred in connection with the sale.

There are ways for the seller to avoid paying capital gains tax. You can read more about them in our detailed capital gains guide or this succinct article.

For Anuradha, who wants to distribute the money among her sons, she would have to do so after paying capital gains tax. Under our assumption of cost price of Rs 10 lakh, the capital gains come to Rs 16 lakh and her tax due on the same would be Rs 3.2 lakh, minus the basic exemption limit that she can avail as per her age and income.

Her sons will not have to pay taxes on the money they receive since there is no tax on gifts received from a relative.

To get further help on filing tax returns on income that comes from house property, you can buy a clearTax expert-assisted plan. But clearTax is always free for those who want to e-file their returns themselves.

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