How to use Double Indexation to reduce Capital Gains Tax
Cost Inflation Indexing allows you to compare the current cost of the asset with the current sale value so that a realistic & fair amount is determined as capital gain / loss from the sale of such asset. (Click here to know more about inflation & cost inflation indexing)
Such indexation of cost helps you to effectively reduce the tax outflow on account of any capital gain resulting out of sale of any long term capital asset.
Now would it not be exciting to have “icing on the cake”, if you were able to claim additional indexation benefit by playing around with the date of asset purchase and sale.
Let us take an example to see if you can really effect a tax cut in your favour by changing the dates.
Situation 1 – You have purchased a house on April 1, 2000 and sold the same on March 31, 2009
Situation 2 – You have purchased a house on March 31, 2000 and sold it on April 1, 2009.
Now we have just changed the dates by a day at either ends and accordingly let us see how this change impacts your taxes.
|
Sr. No.
|
Particulars
|
Situation 1
|
Situation 2
|
|
1
|
Purchase Cost
|
10,00,000
|
10,00,000
|
|
2
|
Date of Purchase
|
April 1, 2000
|
March 31, 2000
|
|
3
|
Year of Purchase
|
2000-01
|
1999-2000
|
|
4
|
Cost Inflation Index (as notified by the government)
|
406
|
389
|
|
5
|
Sale Value
|
20,00,000
|
20,00,000
|
|
6
|
Date of Sale
|
March 31, 2009
|
April 1, 2009
|
|
7
|
Sale Year
|
2008-09
|
2009-10
|
|
8
|
Cost Inflation Index (as notified by the government)
|
582
|
632
|
|
9
|
Indexed Cost of Purchase
|
14,33,498
|
16,24,679
|
|
|
1 x 8 = 7
4
|
|
|
|
10
|
Capital Gain / (Loss)
|
566,503
|
375,321
|
|
|
|
(5 – 9 = 10)
|
(5 – 9 = 10)
|
|
11
|
Tax on Capital Gains @ 20%
|
113,301
|
75,064
|
Hence it seems that Situation 2 (change of dates) results in an overall savings of about Rs. 38,000 of tax.
Considering the above, in case you are either planning to buy an asset or sell an asset that fringes on border dates then it would be best to pre-pone or post-pone the dates so as to maximize your tax bill.
- Team RwT
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