Here's How To Estimate Cost of Acquisition And Capital Gains For Properties Purchased Before 2001

The Income Tax Department on July 25, 2024, issued a clarification regarding the Cost of Acquisition for assets acquired before April 1, 2001. This clarification came as several taxpayers expressed doubts about the calculation of capital gains and associated tax liabilities, particularly in light of the changes proposed in the Union Budget 2024-25.

The Union Budget for 2024-25 had proposed to eliminate the indexation benefit for computing long-term capital gains on property purchased from 2001 onwards. Instead, a 12.5 per cent capital gains tax will be applied to these assets, as opposed to the earlier rate of 20 per cent.  Properties bought after 2001 can no longer be adjusted for inflation, potentially increasing the tax burden for owners unless they reinvest in a new property. Notably, indexation benefits will continue to apply to properties bought before 2001.

This is why the Income Tax Department brought a clarification via its X handle. The post on the X platform read, "An issue has been raised as to what would be the Cost of Acquisition as of April 1, 2001, for properties purchased before 2001. For properties (land or building or both) purchased prior to  April 1, 2001, the cost of acquisition as of  April 1, 2001, shall be either: the cost of Acquisition of the asset to the assessee; or

the Fair Market Value (not exceeding the stamp duty value, wherever available) of such asset as on April 1, 2001.  Taxpayers can choose either option as per section 55(2)(b) of the Income-tax Act, 1961."

Example On How To Determine Cost Of Acquisition & LTCG tax

The Income Tax Department gave an illustration of property acquisition and sale details, to understand how the calculation is done.

Consider a property that was acquired in 1990 for Rs 5 lakh and its stamp duty value as of April 1, 2001 was Rs 10 lakh. The Fair Market Value (FMV) of the property as of the same date was Rs 12 lakh. If the property was sold on or after July 23, 2024, for Rs 1 crore, here's how capital gains tax will be calculated.

The cost of acquisition as of April 1, 2001, will be taken as which is the lower of the stamp duty value or FMV, and here it will be stamp duty value at Rs 10 lakh.

The Indexed Cost of Acquisition in FY 2024-25, accounting for inflation, was calculated as Rs 36,30,000.

Here's how that was calculated:

• Cost Inflation Index (CII) in 2001       - 100 

• Cost Inflation Index (CII) in 2024-25- 363

• Indexation Factor = 363/100

• Indexed Cost of Acquisition = 10,00,000 × 3.63 = Rs 36.30 lakh

So now under the old regime, the Long-Term Capital Gain (LTCG) is calculated as Rs 1 crore minus Rs 36.30 lakh which equals Rs 63.70 lakh on which 20 per cent tax is imposed, resulting in a tax payable of Rs 12.74 lakh.

Under the new regime, with no indexation benefit, the LTCG is Rs 90 lakh, with a tax rate of 12.5 per cent, resulting in a tax payable of Rs 11.25 lakh.