- In LTCG, you can deduct the indexed acquisition and improvement cost from the sale price. This helps in reducing your capital gains as the acquisition or improvement cost gets higher.
An important factor that you need to consider while calculating LTCG is the cost inflation index (CII). The government declares this index every year. CII is a crucial factor in determining the indexed cost of acquisition and improvement.
Cost Inflation Index = Index for the financial year of the transfer/ Index for the financial year of the acquisition
Let's take a look at an example-
Mr. Singh purchased a property for Rs. 10 Lakhs in the year 2005. He sold that property for Rs. 30 Lakhs in the year 2015.
CII in the year 2005 was 480, and in the year 2015, it was 1024.
CII = 1024/480. Thus, CII is 2.13.
Indexed cost of purchase = Cost inflation index x Purchase price. That is 2.13x1000000.
Therefore, the indexed cost of purchase is Rs. 21,30,000.
LTCG = Sale price – Indexed cost. 3000000 – 2130000= 870000.
The tax on LTCG is 20%.
In this situation, the tax will be 20% of 8,70,000. The capital gains tax on sale of land will be Rs. 1,74,000.
Therefore, Mr. Singh must pay Rs. 1,74,000 as tax on LTCG.
