Save Income Tax Through Cost Inflation Index
Todays post is dedicated to one of our Reader Mr Ramesh. He has asked us the question about calculating the cost of inflation chart index for his property. First of all you should see the history of Chart of Index for property in India.
According to the section 48 of the income tax act you can avail the tax benefit of movable or immovable property under this act. The chart is indexed from the year 1981 and its value is set as at 100. Now there are few points to remember if you have bought your property before 1st April 1981 then your base index would be considered be 100 only.
This act was basically kept in place to counter the effect of inflation in India. Since value to Rs is decreasing day by day due to inflation so the actual cost of property would be more in terms of number than its actual face value. This could be quite confusing initially but just keep in mind this formula; it can save a lot of bucks in terms of tax benefit for you.
Formula to calculate actual cost of property using Cost inflation chart index.
Actual Cost = (cost at the time of buying * base index at the time of selling)/ base index at the time of buying.
Let us take a real example Suppose Mr Ramesh has bought the property at Rs 4 Lakh in 1981 and if he sells it today at Rs 50 Lakhs then what will be its cost in terms of cost inflation chart.
Actual cost = 4Lakh * 939/100 = 37.56 Lakhs.
So your net long term gain on this property would be Rs 50 lakh – Rs 37.56 Lakh that comes out to be Rs 12.44 Lakhs. So you will have to pay a 20% long term gain tax on Rs 12.44 lakhs than 46 Lakhs( Rs 50 lakhs – Rs 4 Lakhs) . In this way you have actually saved a lot of money in terms of income tax.
Some important points that have to be kept in notice before using this formula are
- This calculation is only applicable for long term gain tax property ie if you have kept the property with you for at least 3 years.
- This calculation is not applicable for NRI’s
- Base index for all the properties bought before 1st April 1981 would be considered at 100.
Hope Mr Ramesh has found his answer in this post 🙂