How Cost Inflation Index Saves You Tax?

April 7, 2007 by taxworry · 4 Comments

Suppose you sell a plot of land for Rs 10lacs in Fy 2006-07 and cost of which was 1 Lac. The plot of land was purchased in 1985-86. Therefore, in your return of income you will have to show the capital gains tax .What is the capital gains? Is it Rs 9(10lacs-1lacs).No, the I T Act provides a method of computing the cost by inflating applying cost inflation index notified by the government every year.So the calculation of long term capital gains is as follows:

Cost = Rs 1,00,000
Purchase year =1985-86
Cost Inflation Index for 1985-86 is 133
Sale year = 2006-07
Cost Inflation Index for 2006-07 is Rs 497
Inflated cost = 1,00,000 x 497 /133= 3,73,684
So long term Capital gains is :
Sale value 10,00,000
less
Cost of land 3,73,684

—————
6,26,316
You will have to pay tax @ 20% on this amount.

The chart for the cost inflation index from 1981-82 onwards is as under:

Filed under capital gains · Tagged with

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Comments

4 Responses to “How Cost Inflation Index Saves You Tax?”

Ranjan says:

April 10, 2007 at 7:42 am

very useful. I’m sure this applies to sale of flats/house too apart from land?
malar1973 says:

July 11, 2007 at 10:16 am

but why tax @ 20%? Since this is a long term (> 3yr) capital gain, I thought that there would not be any tax at all! Isn’t so?
malar1973 says:

July 11, 2007 at 10:19 am

But why tax @ 20%? Since it is a Long term capital gain (> 3yrs), I thought the sale would not attract any tax at all! Isn’t so?
Anonymous says:

December 27, 2008 at 6:53 am

Is the index for 2006-07 is 519. It is mentioned as 497. Clarify