Can I include construction cost as cost of improvement of the property in calculating Long Term Capital Gains?

Question

I have a residential land that was bought in December 2001, registered for a value (cost of land) of Rs.1.75 lakhs. Then by December 2004, I have completed construction of residential building in that land and the cost of construction was Rs.10 lakhs.

Now I am planning to sell the entire property for Rs.34 lakhs (value split: land - 24.75 lakhs, building - 9.25 lakhs) by Feb 2007.

Given the above numbers & dates, I would like to confirm that the gain is long term capital gain (LTCG)? Correct me if I am wrong.

Can I include the construction cost as the cost of improvement of the property in calculating LTCG?

What would be the rate of tax, service/surcharge/any other tax, if any, for LTCG per above asset transfer?

Thanks in advance,
Ram

Answer 1

As of today, you can only sell the property consisting of the land and the building. Since the building was constructed and completed in December 2004, the three year period will end only on 31.12.2007. If you dispose of the residential property (which of course will include the land), the cost of construction obviously gets added to the cost of land to give you the value of the property. You can dispose of the property at any time but to be eligible for long term capital gains tax, you should have completed three years after the certified date of completion which will no doubt be as per the municipal certificate of completion. If the property is sold for Rs. 34 lakhs, the difference between Rs. 34 lakhs and Rs. 11.75 will constitute the long term capital gains. You will be paying 20% as long term capital gains tax with appropriate surcharge or education cess as it will exist on the day of disposal.

You can also save this tax by investing the gains in bonds of Rural Electrification Corporation or National Highways Authority of India within six months of the date of sale of this property. You can also save the tax by investing the entire proceeds in another residential property of your choice. Sections 54EC and 54 of the Income Tax Act, 1961 in India refer. Please always consult a professional before payment of tax as he will tell you about cost indexation that can be done to minimise the tax outgo.

Answer 2

The formula for long term capital Gain is: Sales Consideration Less: Indexed Cost Of Purchase/Improvement (Cost Of Purchase or Improvement/Cost Inflation Index of Purchase Year) *Cost Inflation Index of Sales Year

Answer 3

The Capital Gain accruing to you is Short Term Capital Since it takes 3 years in case of residential property to be called long term capital asset.
So Capital Gain on the house property would be Rs. 22.25 lacs(34lacs-11.75lacs).
Tax on this comes to Rs.691713/- assuming that you do not have any other income.
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Answer 4

Dear Ram
my experiance says your question is a fabricated one, not an actual problem
please post actual problems
regards
sharad