InvestorQ : Can you explain with an example how the cost inflation indexing actually work in practice?
NISHA Nayak made post

Can you explain with an example how the cost inflation indexing actually work in practice?

Answer
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1 year ago


If you purchase an asset in September 2010 at Rs.64 lakhs and sold the property at Rs.127 lakhs in Sept 2017 then here is how your capital gains will be calculated purposes.

Particulars

Amount

Indexation

Amount

Cost of Purchase

Rs.64 lakhs

Actual Capital Gain

Rs.63 lakhs

Month of Purchase

Sept 2010

Indexed Cost of Buy

{63x(272 / 167)

Fiscal Year

FY 2010-11

Rs.103 lakhs

Sale Value

Rs.127 lakhs

Sale Value

Rs.127 lakhs

Month of Sale

Sept 2017

Indexed Capital Gain

Rs.24 lakhs

Fiscal Year

FY 2017-18

Tax at 20%

Rs.4.80 lakhs

In the above in Illustration 3, the taxable capital gains come down from Rs.63 lakh to Rs.24 lakh. The tax paid is just Rs.4.80 lakhs. The effective tax paid on LTCG on the sale of house property, therefore, works out to just 7.6% (4.80 lakhs / 63 lakhs). This is the benefit that indexation proffers to the investor when calculating the tax on capital gains.