How to calculate long term capital gains with indexation?

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    How to calculate long term capital gains with indexation?
    If you buy a property and sell it after three years at a profit, you would have to pay long term capital gains tax. Say for example you bought a property in 2003 for Rs 20 lakhs and have now sold it for Rs 40 lakhs in 2013, you are to pay a capital gains tax on the profit of Rs 20 lakhs.

    The current rate of long term capital gains is 20 per cent with indexation. Therefore, in the above example you do not have to pay 20% of Rs 20 lakhs profit, since you have to take into account indexation as well.

    What is capital gains with indexation?

    Since inflation has eaten into your profits, the government allows you indexation benefits, which is calculated based on the cost inflation index. The Cost inflation index is released every year sometime in the middle of the year. The table below shows you the cost inflation index. So, in the above example you can see the Indexed Cost of Acquisition = (Actual cost of purchase) x (CII Of Year of Sale)/(CII of Year of Purchase).

    Therefore the indexed cost of acquisition in the above case would Rs 20 lakhs x 852/447 = Rs 38,12,080

    Therefore you would pay capital gains as follows: Sale price - minus indexed cost of acquisition = Rs 40,00,000 - 38,12,080 = Rs 1,97,820

    Therefore the capital gains would be 20 per cent of Rs 1,97,820 = Rs 39,564

    Table with cost inflation index since 1981-82

    Year                    Cost Inflation Index

    1981-82              100
    1982-83              109
    1983-84              116
    1984-85              133
    1985-86              140
    1986-87              150
    1987-88              161
    1988-89              172
    1989-90              182
    1990-91              199
    1991-92              223
    1992-93              244
    1993-94              259
    1994-95              281
    1996-97              305
    1997-98              331
    1998-99              351
    1999-2000          389
    2000-2001          406
    2001-2002          426
    2002-2003          447
    2003-2004          463
    2004-2005          480
    2005-2006          497
    2006-2007          519
    2007-2008          551
    2008-2009          582
    2009-2010          632
    2010-2011          711
    2011-2012          785
    2012-2013          852

    Read more about: long term capital gains
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