2. Long-term Capital Gains
This capital gain is applicable when you sell your house after two year from the date of its purchase. The profits arising from selling that house are categorised under long-term capital gains. The profit attracts a tax rate of 20% considering the indexation factor. However, you can claim tax exemptions, unlike short-term capital gain.
[Source]
It is calculated by subtracting the sum of the following expenses from the final selling price of a house –
Long-term capital gain = total value of the consideration received/accruing – (indexed cost of acquisition + indexed house improvement expenses + cost of transfer)
You can calculate this indexation factor by dividing the Cost Inflation Index of the year you sold the house by the CII of the year you purchased that house. Now, multiply the initial purchasing cost of the house with this indexation factor to obtain the indexed acquisition cost.
Let's understand how to calculate long term capital gain on house property with a simple example using this formula:
Mr Y bought a house worth ₹45 lakhs on 20th January 2010. He sold that house at ₹95 lakhs in August 2015. The brokerage cost was ₹1 lakhs, and the house improvement cost was ₹5 lakhs. Therefore, the calculation for long-term capital gain is as follows:
- Step 1: Compute Indexation Factor
The CII of the purchasing year (2010) was 167, and it was in the selling year (2015) is 254. Therefore, after dividing 254 by 167, the indexation factor equals 1.5209
- Step 2: Assess the Indexed Cost of Acquisition
Multiply the purchasing price of the house ₹45 lakhs with the indexation factor of 1.5209. Then, Indexed Cost of Acquisition = ₹45 lakhs*1.5209 = ₹68.44 lakhs
- Step 3: Determine the Indexed House Improvement Expenses
Multiply the home improvement expenses of ₹5 lakhs with the indexation factor of 1.52. Therefore the Indexed Home Improvement Expenses = ₹5 lakhs*1.5209 = ₹7.6 lakhs
- Step 4: Calculate Long-term Capital Gains