This is calculated using Cost Inflation Index (CII). In cases where the property is bought before 2001, the IT laws allow you to adopt the fair market value as of 1
st April 2001. It may be noted that this fair market value cannot be higher than the circle rate/guidance value as of this date.
The CII of 2001-02 is taken as base value of 100 and this value for current FY is 331.
The Indexed Cost of Acquisition will thus be = 331/100*(FMV as of 1st April, 2001).
If you have spent for any maintenance etc., you can add to this and claim.
The capital gain tax will be 20% of the Sale value minus Indexed Cost of Acquisition.
Surcharge and Cess will be as applicable on the above tax computation.
3. How to invest this money and in what type of instruments so that tax can be saved?
Ans: You can save tax on the capital gains by investing into different avenues:
a. Purchase or construct another house. New house is purchased one year before or two years after the sale of the old house or new house is constructed within 3 years after the sale of the old house. This new house can’t be sold within 3 years of possession. The cost of new property should be less than the earlier sale amount.
b. You can invest in 54EC bonds to a maximum limit of Rs 50 lakh. You must invest in notified bond within 6 months of sale.