Mukesh Patel.in
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INDEX YOUR GAIN AND REDUCE YOUR TAX PAIN!

Availing the Benefit of Indexation, you can Inherit Today,

Sell Tomorrow & Still Keep Away your Tax Sorrow!

 

If your grandfather had acquired a plot of land for Rs.10,00,000 in late 1981, which you received by way of inheritance on his death in 2010 and you were planning to sell the same in early 2011 for a consideration of Rs.71,00,000, what would be the income-tax you would be required to pay on your capital gains?

 Difficult to believe, but ‘zero tax’ is the correct answer.

Computation of taxable Long Term Capital Gains (LTCG) under the Income-tax Act is entitled to the benefits of Indexation. The Cost of Acquisition (COA) and Cost of Improvement (COI) of a capital asset have been linked to ‘Cost Inflation Index’ (CII), which is notified by the Central Government and which is annually updated. LTCG are accordingly computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer, the Indexed Cost of Acquisition (ICA) and Indexed Cost of Improvement (ICI).

 

Starting from Assessment Year 1981-82, as the base year, the Central Government has notified, the CII for each year having regard to 75% of average rise in consumer price index for urban and non-manual employees. The COA or the COI is adjusted with reference to the CIT applicable in the relevant year. The Central Government has notified CII for the Financial Year 1981-82 to 2009-10, the figures of which have been shown under a separate table.

 

For the above purposes, ICA or ICI shall mean an amount which bears to the COA or COI, the same proportion as CII for the year in which the asset is transferred bears to the CII for the first year in which the asset was held or improved by the taxpayer or for the year beginning on the 1st April, 1981, whichever is later.

 

TABLE SHOWING NOTIFIED COST INFLATION INDEX AND
CII MULTIPLIER FOR COMPUTING INDEXED COST OF ACQUISITION

 

 Year of Acquisition              Cost Inflation         Cost Inflation Index of Capital Asset                      Index Notified       Multiplier for computing                                           by Government      Indexed Cost Acquisition(Financial Year)                                             of Asset sold in FY 2009-2010


1981-82                                      100                                   7.1100
1982-83                                     109                                   6.5229
1983-84                                     116                                   6.1293
1984-85                                     125                                   5.6880
1985-86                                     133                                   5.3459
1986-87                                     140                                   5.0786
1987-88                                     150                                   4.7400
1988-89                                     161                                   4.4161
1989-90                                     172                                   4.1337
1990-91                                     182                                   3.9066
1991-92                                     199                                   3.5729
1992-93                                     223                                   3.1883
1993-94                                     244                                   2.9139
1994-95                                     259                                   2.7452
1995-96                                     281                                   2.5302
1996-97                                     305                                   2.3311
1997-98                                     331                                   2.1480
1998-99                                     351                                   2.0256
1999-00                                     389                                   1.8278
2000-01                                     406                                   1.7512
2001-02                                     426                                   1.6690
2002-03                                     447                                   1.5906
2003-04                                     463                                   1.5356
2004-05                                     480                                   1.4813
2005-06                                     497                                   1.4306
2006-07                                     519                                   1.3699
2007-08                                     551                                   1.2904
2008-09                                     582                                   1.2216
2009-10                                     632                                   1.1250
2010-11                                     711                                   1.0000

 

 


Note: The above referred Cost Inflation Index (CII) Multiplier can be used for quick computation of ‘Indexed Cost of Acquisition’ (ICA) of Capital Assets sold in the Financial Year 2010-11. The CII Multiplier to be multiplied to the ‘Regular Cost of Acquisition’ (RCA) should be selected on the basis of the Year of Acquisition of the Capital Asset e.g. if an asset purchased for Rs.1,00,000 in 1984-85 is sold in 2010-11, the ICA will be Rs.1,00,000 (RCA) x 5.6880 (CII Multiplier for 1984-85) = Rs.5,68,800.  


 

TAX SHELTER FOR GIFTED & INHERITED ASSETS

Section 49(1) of the Income-tax Act provides that where the capital asset has been acquired by the taxpayer in any of the modes such as on partition of a Hindu Undivided Family or under Gift or Will or by succession or inheritance, etc., the cost to the previous owner shall be deemed to be cost of acquisition of the taxpayer.

Similarly, Section 2(42A) provides that where a capital asset is acquired by way of gift or inheritance as mentioned in Section 49(1), period of holding of the previous owner shall also be included in the period of holding of the taxpayer.

THE MAGIC WAND OF INDEXATION!

In the case referred to hereinabove, if just the above two concessional provisions were taken into consideration, your taxable capital gains (deemed as long term) would still have worked out to Rs.61,00,000 (71,00,000 – 10,00,000) attracting a tax liability of Rs.12,56,600 (at 20.6%).

 

However, as per the ruling of the three member Mumbai Special Bench of the Income Tax Appellate Tribunal (ITAT) in the case of ‘DCIT v. Manjula J. Shah’ 126 TTJ 145 (Mum) (SB), the benefit of computing ‘Indexed Cost of Acquisition’ (ICA) can also be availed in cases of transfer covered under Section 49 such as assets received via gift or inheritance.

Considering the ‘Cost Inflation Index’ (CII) of 711 for 2010-11 with reference to the CII of 100 for 1981-82, the ICA of the plot of land inherited and proposed to be sold by you in the above mentioned case would work out to Rs.71,10,000. Since your sale consideration is expected to be Rs.71,00,000, you will end up with the good fortune of enjoying zero tax.

Logically relying on the ratio of a number of Supreme Court decisions, the ITAT held that in accordance with the principles of purposive interpretation of statutes, ICA has to be computed by taking into account the period for which the asset was held by the previous owner. The Special Bench also held that the contention of the revenue was clearly not in consonance with the underlying legislative intention. Moreover, the Departmental interpretation will only lead to absurdity and unjust results and defeat the very purpose of the concept of ‘indexed cost of acquisition.’

The Special Bench ruling of the ITAT, being binding on all Tribunals in the country, grants a unique tax shelter in all cases of capital gains arising on sale of gifted or inherited assets.

 

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