Any profit on sale of an asset is taxed under capital gains which is one of five heads of income under which all your incomes are taxed in India. Let us understand how the income from capital gains on sale of property is computed.
Holding period is basis of taxation
All your assets are divided into two categories for the purpose of taxation depending on the period for which the asset was held by you on the date of sale/transfer. In case the property in question was held by you for more than 24 months on the date of sale, any profit made on it is treated as Long Term Capital Gains (LTCG). Profits made on property held for 24 months or less is recognised as Short Term Capital Gains (STCG) which is treated like your other income and taxed at the slab rate applicable to you.
How the holding period for property received on inheritance or as gift is computed
In case the asset is bought by you, the date of agreement for purchase is the starting point for computing the holding period. In case there is gap between the agreement date and registration date, the date of agreement is taken as the date on which you became owner of the property. The registration of an agreement dates back to the date of agreement.
For the purpose of computing holding period, in case the property is received by you as gift or inheritance, the period is counted from the date on which any of the previous owner had bought it for consideration. So in case you get a gift of property from your father who had inherited the same from your grandfather who had bought it, the holding period will be counted from the date on which your grandfather had bought it and not the date on which your father had inherited it.
Though there are no cleat cut provisions for counting holding period in case of under construction booked with builder and the judicial opinion is divided. So in case you transfer under construction house property before taking possession, the holding period shall be counted from the date of booking. However in case the property is transferred after taking possession, the holding period should be computed from the date you get possession and not the date of booking. There are exceptions to this rule. In case the house is allotted under self-financing scheme by development authorities like Delhi Development Authority, where the date of allotment may be used for the purpose of computing the holding period as per circulars issued by the Central Board of Direct Taxes (CBDT).
As both the assets are different and since there is no provision under the law to add the period of construction for the purpose of computing holding period for ready property, it is advisable to be conservative. So in case you wish to sell the under construction property shortly after taking the possession, it would be prudent to do so before taking possession to avoid any litigation and to be able to get the benefit in respect of long term holding if the same has already completed 36 months.
In case property acquired or received as gift or inherited by you before 1st April 2001, you have the option to substitute the fair market value of the asset as on 1st April 2001 for your cost of acquisition of the property.
How the cost is computed
All the costs such as brokerage, stamp duty and registration charges are to be treated as part of the cost of the property. Any expenditure incurred for improvement or renovation is eligible for deduction as ‘cost of improvement’.
Benefit of indexation
In case the holding period is more than 24 months, the law gives you the benefit of indexation whereby you can enhance your cost of acquisition. Your cost of acquisition is required to index with reference to the “cost inflation index” as notified by the government for the year of sale and the year of acquisition. The cost inflation index is notified every year by the government. (The author is a tax and investment expert and can be reached on firstname.lastname@example.org)