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Budget 2017 shifted indexation calculation base to 2001

 
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anildhope



Joined: 17 Jun 2008
Posts: 514

PostPosted: Tue Apr 18, 2017 7:50 pm    Post subject: Budget 2017 shifted indexation calculation base to 2001 Reply with quote

Although the Budget did not propose any major changes on the tax front, the move to shift the base year for computation of indexed cost of acquisition of an asset could have an impact for investors. However, the impact would differ across assets that enjoy indexation benefit on long term capital gains—real estate, unlisted shares, gold and bond funds. Here’s a look at the possible impact on your tax burden going forward.

WHY INDEXATION HELPS
Indexation refers ..

Balwant Jain

The budget 2017 presented by the Finance Minister has proposed many changes affecting computation of capital gains. Let us discuss the major proposals:

Shift of the base year for indexation of cost of acquisition

Presently in case the capital asset sold by you was acquired by you prior to 1st April 1981 you have the option to substitute the fair market value as on 1st April 1981 as cost of acquisition and take the benefit of indexation on such fair market value on the basis of cost inflation Index for the year of sale announced by the government from time to time. The budget proposes to shift the date from 1st April 1981 to 1st April 2001. This will be beneficial for the tax payers as the price appreciation between the date of acquisition and 1st April 2001 will become fully tax free. Though the government allows you the benefit of partly enhance the cost by applying the cost inflation index but this just covers the appreciation in the asset which is evident from the prices of equity shares in  India. For example the cost inflation index of 1125 for the financial year 2016-2017 with a base of 100 for 1981-82 gives average of 7.16%. Whereas the Sensex value of 100 with base of 1979 has grown to 28240 on 3rd February 2017 thus growing by 16.47% on annual basis. So by shifting the base year the finance minister proposes to give the tax payers big relief as the price appreciation during the date of acquisition till date of sale has become fully tax free in your hand.

Reducing the holding period requirement for immovable property

Generally the profits on sale of capital assets become taxable on the basis of the period for which the asset is held on the date of sale. This varies between 12 months to 36 months depending on the type of capital asset.  Hitherto for immovable property the holding period requirement has been 36 months. The budget proposes to reduce this to 24 month and bring it on par with unlisted shares.  This amendment is also very beneficial for the tax payers as once the capital asset sold by you qualifies for being long term asset, you just need to pay tax @ 20% on the profits so made and that too with the benefit of indexation.  Moreover this also gives you various options to save the taxes by investing the sale proceeds/capital gains in residential house /capital gains bonds and thus legally escape from the liability to pay any long term capital gains. It may be noted that short term capital gains on sale of your immovable property are treated like your normal income and are taxed at the slab rate applicable to you. Moreover there are no investment options available to you to save the tax on such short term capital gains.

Some transactions not to be treated as transfer and cost of acquisition for such transactions

There are certain transaction as enumerated in section 47 of the Income Tax Act, which though result into a different asset but are not treated as transfer for the purpose of computation of capital gains and therefore do not attract any tax liability. The finance minister has proposed to treat the event of conversion of preference shares into equity share of a Company not to be regarded as transfer. The finance minister has also proposed to make some changes in the law for the purpose of ascertainment of cost for computation of capital gains on sale of such shares. The budget proposes that the cost of the original preference shares shall be treated as cost of the equity shares sold. The budget also proposes that the cost for original units which are merged in the new scheme on consolidation of different schemes of a mutual fund shall be taken as the cost for the purpose of computation capital gains. The transaction for such consolidation is not be treated as transfer under Section 47 was provided for by the budget of 2016. Likewise the period for which the preference shares and the old units were held by the tax payer shall also be taken into account while computing the holding period of these shares and units.

Date of transfer in case of transactions of redevelopment of property

Since giving of possession of an immovable property in part performance of an agreement is treated as transfer under the income tax laws, the cases of redevelopment of property which are very common nowadays have resulted into litigation and have caused genuine hardship to the taxpayers. The budget proposes that in case of individual and HUF tax payers, the date of transfer for the purpose of redevelopment of property shall be the date on which the completion certificate of the project or part of the project is issued by the competent authority like Municipality, gram panchayat or area development authority like Delhi development Authority.  So the capital gains computations, indexation and the period for claiming exemption will apply accordingly. However in case the transferee sells his right under the project before completion of the project, the year in which he transfer such right shall be taken for the purpose for capital gains computations.

Conditions for claiming exemption on transfer of listed shares

Presently Section 10(3Cool of the income tax act exempts capital gains whish arises on sale of a equity shares listed on any stock exchange in India and  held for more than 12 months and  on which security Transactions Tax (STT) has been paid. This provision has been grossly misused by people for money laundering so the budget provides an additional condition in respect of equity shares acquired after 1st October 2004, the date on which STT became applicable. The budget provides that for such shares the long term capital gains shall become exempt only if STT has been paid on purchase of such transactions as well. The government is being authorised to notify some other acquisitions on which though no STT has been paid will still continue to be exempt under Section 10(3Cool. This notification should include the shares acquired under IPO, FPO, bonus shares, ESOPs etc. to carve out genuine transaction of acquisition of listed shares.

FINANCIALYEAR COST INFLATION INDEX
2016-17 1125
2015-16 1081
2014-15 1024
2013-14 939
2012-13 852
2011-12 785
2010-2011 711
2009-2010 632
2008-2009 582
2007-2008 551
2006-2007 519
2005-2006 497
2004-2005 480
2003-2004 463
2002-2003 447
2001-2002 426
2000-2001 406
1999-2000 389
1998-1999 351
1997-1998 331
1996-1997 305
1995-1996 281
1994-1995 259
1993-1994 244
1992-1993 223
1991-1992 199
1990-1991 182
1989-1990 172
1988-1989 161
1987-1988 150
1986-1987 140
1985-1986 133
1984-1985 125
1983-1984 116
1982-1983 109
1981-1982 100
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anildhope



Joined: 17 Jun 2008
Posts: 514

PostPosted: Tue Apr 18, 2017 7:56 pm    Post subject: New cost Inflation Index Base Year 2001-2002 as per Budget Reply with quote

In Budget 2017 Finance Minister Mr. Arun Jaitley has made changes in the cost inflation provision.

Where a capital asset became the property of the assessee before 1-4-1981, the assessee is having an option to substitute the FMV of the Capital asset as on 1-4-1981 as its cost of acquisition. In budget 2017 it is now has been changed that in respect of such capital asset acquired prior to 1-4-2001, the assessee has now an option to use the fair market value as on 1-4-2001  as its cost of acquisition

The definition of cost of improvement has been amended provided that “In respect of a capital asset which became the property of the assessee or the previous owner prior to 1-4-2001, cost of improvement shall mean all expenditure of capital nature incurred on or after 1-4-2001 by the assessee or by the previous owner in making value additions or alteration to the capital asset”.

Subsequently section 48 has also been amended which provide the base year for the purpose of computing indexed cost of acquisition which is been shifted from 1-4-1981 to 1-4-2001

The following are the latest applicable cost inflation index:

Cost Inflation index base year 1-4-2001

Year

Cost Inflation index

2001-02

100

2002-03

105

2003-04

109

2004-05

113

2005-06

117

2006-07

122

2007-08

129

2008-09

137

2009-10

148

2010-11

167

2011-12

184

2012-13

200

2013-14

220

2014-15

240

2015-16

254

2016-17

264

- See more at: https://expertmile.com/arti.php?article_id=1756&New-cost-I#sthash.qsHv3gHi.dpuf

In Budget 2017 Finance Minister Mr. Arun Jaitley has made changes in the cost inflation provision.

Where a capital asset became the property of the assessee before 1-4-1981, the assessee is having an option to substitute the FMV of the Capital asset as on 1-4-1981 as its cost of acquisition. In budget 2017 it is now has been changed that in respect of such capital asset acquired prior to 1-4-2001, the assessee has now an option to use the fair market value as on 1-4-2001  as its cost of acquisition

The definition of cost of improvement has been amended provided that “In respect of a capital asset which became the property of the assessee or the previous owner prior to 1-4-2001, cost of improvement shall mean all expenditure of capital nature incurred on or after 1-4-2001 by the assessee or by the previous owner in making value additions or alteration to the capital asset”.

Subsequently section 48 has also been amended which provide the base year for the purpose of computing indexed cost of acquisition which is been shifted from 1-4-1981 to 1-4-2001

The following are the latest applicable cost inflation index:

Cost Inflation index base year 1-4-2001

Year

Cost Inflation index

2001-02

100

2002-03

105

2003-04

109

2004-05

113

2005-06

117

2006-07

122

2007-08

129

2008-09

137

2009-10

148

2010-11

167

2011-12

184

2012-13

200

2013-14

220

2014-15

240

2015-16

254

2016-17

264

- See more at: https://expertmile.com/arti.php?article_id=1756&New-cost-I#sthash.qsHv3gHi.dpuf

In Budget 2017 Finance Minister Mr. Arun Jaitley has made changes in the cost inflation provision.

Where a capital asset became the property of the assessee before 1-4-1981, the assessee is having an option to substitute the FMV of the Capital asset as on 1-4-1981 as its cost of acquisition. In budget 2017 it is now has been changed that in respect of such capital asset acquired prior to 1-4-2001, the assessee has now an option to use the fair market value as on 1-4-2001  as its cost of acquisition

The definition of cost of improvement has been amended provided that “In respect of a capital asset which became the property of the assessee or the previous owner prior to 1-4-2001, cost of improvement shall mean all expenditure of capital nature incurred on or after 1-4-2001 by the assessee or by the previous owner in making value additions or alteration to the capital asset”.

Subsequently section 48 has also been amended which provide the base year for the purpose of computing indexed cost of acquisition which is been shifted from 1-4-1981 to 1-4-2001

The following are the latest applicable cost inflation index:

- See more at: https://expertmile.com/arti.php?article_id=1756&New-cost-I#sthash.qsHv3gHi.dpuf

The Finance minister in his Budget Speech on Feb-01-2017, revised the Cost Inflation Index used by the Indian Income Tax Department to calculate Long Term Capital Gains Tax with Indexation benefit. The revision was shift in base year from 1981 to 2001. What does this mean ? This means any “asset” as defined by the Indian Income Tax department and which comes under the purview of Long Term Capital Gain [For Example – Real Estate] and if acquired before 2001, then for the purpose of determining the Indexed Cost of Acquisition, the base year henceforth will be 2001.

Let us illustrate with an example. Suppose you bought a Plot of Land in 1980 for Rs 10,000. You plan to sell this Plot of Land in FY 2017-18. Let your selling Price be Rs 50 Lakhs. So what is the Long Term Capital Gain you are liable to pay on the same ?

1. What is the Indexed Cost of Acquisition of this Plot of Land in 2001, the new base year ? This will be determined by the Government Valuation or Valuation Certificate Provided by a Registered Valuer in that City. Let us assume it to be Rs 4,00,000 in 2001.

New Cost Inflation Index Table for FY 2017-18
The Government has not year released the table. However, taking 2001 as base year and already Published Values till FY 2016-17, we extrapolate [difference in percentage of old values added to 100 in 2001-02 which is the new base year] the same data and arrive the the following table.

Indexed Cost of Acquisition = Price in the Year of Purchase or Base Year * [ CII in FY 2017-18 / CII in Year of Purchase or Base Year] Let us assume the new CII for FY 2017-18 to be 279

In our Case the Indexed Cost of Acquisition = 4,00,000 * 279 / 100 = 11,16,000.

Long Term Capital Gain = Selling Price – Indexed Cost of Acquisition = 50,00,000 – 11,16,000 = Rs 38,84,000

We couldn’t wait until the Government published the new CII Index. WE used logic and have arrived at the same. If the Government releases something different, then it will be hard to digest why it did so. Let us wait and watch.

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anildhope



Joined: 17 Jun 2008
Posts: 514

PostPosted: Sat Apr 22, 2017 1:20 pm    Post subject: Reply with quote

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