Friday 13 January 2012

How Direct Tax Code 2012 rewards buyer of assets before 01/04/2000 ?

Direct Tax Code 2012  has changed the rule of computation of capital gains and most striking change is that now a tax payer can choose the fair market value as on 01/04/2000 of an asset as “cost of acquisition” for computing “indexed cost of acquisition”.
Please read section 53 of DTC 2010 which is about cost of acquisition
53. (1) Unless otherwise provided, the cost of acquisition of an investment asset,  shall be-
(a) the purchase price of the asset; or
(b) at the option of the person, the fair market value of the asset on the 1st day of April, 2000, if the asset was acquired by the person before such date.
How does that benefit you ?
Let us say you bought a property in 1989 for Rs 11 Lakhs and planning to sell it for Rs 1o million ( 1 crore) after 01/04/2012.  If you compute the long term gains under Income Tax Act 1961 (present ACT) , the formula for finding the indexed cost would be as under
[math] Rs 11,00,000 x Cost inflation Index for 2012 / Cost inflation index for FY 1989[/math]
The cost inflation index of 1999  is 172 and a prudent guess forCII for Fy 2012-11may be 850. It means that indexed cost will merely increase to just twice .  So at best the indexed cost will be Rs 55,00,000.
The long term gains will be Rs 1,00,00,000  - Rs 55,00,000 = Rs 45,00,000
How things can change after 01/04/2012 ?
The Direct Tax Code 2012 provides that the assessee can choose to substitute cost of acqusition with the  Fair Market Value as on 01/04/2000 .  So , a property bought before 01/0/04/2000 will have the benefit of  substituting the cost of acquisition to fir market price as on 01/04/2000 . Since the market price is always more than the official indexation , the cost of acquisition can be claimed many fold which can actulay reduce the capita gains. That Fair Market Price will become the base price on which indexation formula shall be applied.
What measures should one take for maximum benefit?
Get your immovable property valued by a Registered Valuer for market value as on 01/04/2000. In case you sale , the Fair Market Value should be taken to compute long term gains. Who knows you will not only get to save the tax , but may be there would arise loss which can be carried forward.
Two important points to note
Please note that the Direct Tax Code 2012 states that the rule to determine Fair Market Value shall be prescribed which means the Rule to determine shall be notified later on.
Second point to remember, if you incurred cost of improvement on your property before 01/04/2000 , you can even determine Fair Market Value  of the  cost of improvement as on 01/04/2000 and then indexation benefit is to be taken

1 comment:

Unknown said...

It really is important to have a personal knowledge on what is happening to your business.

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