I invested Rs 45 lakh in a Noida property in 2009; sale deed was made in 2014. Which year will be considered purpose of indexation of capital gains?

I had invested Rs 45 lakh in a Noida property, in two instalments, in 2009. After the completion of the project, the sale deed was made in 2014, and the stamp duty and additional expenses on interiors were also paid and incurred in the same year. Which year shall be considered for the purpose of indexation of capital gains?

Amit Maheshwari, Partner, AKM Global:

As per the provisions in Section 48 of the Income-tax Act, 1961, in case of a long-term capital asset, the benefit of indexation can be availed of with the help of the relevant Cost Inflation Index (CII). The indexed cost shall be the cost proportioned in accordance with the CII of the year of transfer, that is, the sale, divided by the CII of the year of acquisition of the asset, or year of improvement, as the case may be. Hence, the indexed cost of acquisition/improvement will be determined for each year separately from the date of payment, that is, from 2009 to 2014.

I sold my house in mid-2020. After indexation, the transaction resulted in a capital loss of around Rs 5 lakh. I had long-term capital gains of nearly Rs 50,000 each in 2021-22 and 2022-23. Since the amount was less than Rs 1 lakh, it was exempted from tax. When I filed my tax return (ITR 2), I found that my LTCG had been automatically adjusted against capital loss and the balance was carried forward. I want to know why LTCG, which was less than Rs 1 lakh a year, was adjusted against capital loss when it is fully exempt from tax? Are there any guidelines on exempt LTCG being adjusted against capital loss?

Sudhir Kaushik, Co-founder & CEO, TaxSpanner: The adjustment of carried forward losses with exempted capital gains has been correctly executed. The income-tax laws, with regard to capital gains adjustment, have some restrictions or rules relevant to you as below: Before carrying out any inter-head adjustment, the taxpayer has to make intra-head adjustment. Any loss under the head capital gains cannot be set off against income under other heads of income. If the loss under the head capital gains incurred during a year cannot be adjusted in the same year, the unadjusted capital loss can be carried forward to the next year. In the subsequent year(s), such a loss can be adjusted only against the income chargeable to tax under the head capital gains. However, long-term capital losses can be adjusted only against long-term capital gains. Hence, the carried forward losses can be adjusted against long-term capital gains, which include taxable and exempted gains too.

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