What is Profit? Answer is very simple,” it’s just a financial gain, especially the difference between selling price and buying price. Here selling price should be higher than buying price to earn profit/gain else you may incur loss”. Very short explanation and easy to understand na..??
But what if, you have incurred some amount of expenses while buying, maintaining the asset till you sell it? Here you have to consider not only the amount spent on buying, but also the cost of maintenance, transportation, even expenses you bear while selling.
Do you think you can apply the same formula while calculating the gains from selling your residential house property? Hmm Yes! but it partly right. Here you have to struggle little more to figure out the actual gains from such transaction.
While you sell a house property, you should not only consider the buying price and selling price, but also you have to take cost of acquisition, holding period, tax liabilities, indexation etc into account.
Basically the gain/loss arise out of selling a house property is treated as short term capital gain/loss or long term capital gain/loss depending upon the period of holding the capital asset i.e. the house property. If you owned the house property for less than three years (36 months) before selling it, then it is considered a short-term capital asset and if you sell it after three years (36 months), it is a long-term capital asset. Any Gain/Loss arises during selling the house will be considered as short term capital gain/loss (if it’s a short term capital asset) or long term capital gain/loss (if it’s a long term capital asset).
For better understanding, let’s take an example;
Mr. Tax Payer purchased a house for Rs 8,50,000 on Jan 20, 1992, and sold it on Oct 1, 2012, for Rs 85,00,000. During June 2001, he spent Rs. 3,00,000 for improvement in the house. While selling the house he had to incur Rs. 1,50,000 as selling expenses. Since he sold the house 36 months after he bought it, the capital gain will be long term.
To calculate the Long Term Capital gain, we have to follow the below process step by step;
While arriving at Long Term Capital Gains, it is required to figure out the Index Cost of Acquisition/Purchase Price as well as the indexed value of improvements if any (see Cost Inflation Index or CII)
Thus, Long Term Capital Gains = Rs. 35,39,535. Isn’t it simple to calculate?
Remember, if the house would have been acquired/purchased before 1st April 1981, then the indexed cost of acquisition for the house should have been Fair Market Value of the house as on 1st April, 1981, and then find the indexed cost of acquisition based on this price.
FYI, Long Term Capital Gain is taxed at a flat rate of 20% plus 3% education cess. So the tax liabilities for the above gains will be Rs. 7,29,144 i.e. (Rs. 35,39,535 x 20.60%).
Now it seems to be very easy to calculate the Long Term Capital Gains from Sale of House Property, Isn’t it?