Mumbai, Feb. 1: Union finance minister Arun Jaitley today had good news to those looking to sell their property. In what is expected to reduce their capital gains tax burden, the budget today proposed to change the base year for calculating cost inflation from 1981 to 2001.

Gains arising on the transfer of capital assets are called capital gains. Income from capital gains is classified as short term capital gains (STCG) and long term capital gains (LTCG). While STCG comes if an asset is held for a period of less than three years, it is treated as LTCG if the asset is held for more than three years. This LTCG is now proposed to be reduced to two years.

Under current income tax norms, in the case of LTCG, an individual will have to pay a tax of 20 per cent after indexation. Indexation (which is only available to long term capital assets) is a process by which the cost of acquisition is adjusted against an inflationary rise in the value of asset during the period in which the individual holds the asset.

For this purpose, the government has notified a "cost inflation index". The computation of capital gain will include the full value of consideration, minus the expenditure incurred (brokerage), minus the indexed cost of acquisition and minus the indexed cost of improvement. There is a formula prescribed both for indexed cost of acquisition and the indexed cost of improvement.

Jaitley said that for computing capital gains in respect of an asset acquired before April 1, 1981, the assessee has been allowed an option of either to take the fair market value of the asset as on that day or the actual cost of the asset as cost of acquisition. The assessee is also allowed to claim deduction for cost of improvement incurred after April 1, 1981, if any.

Tax experts welcome the changes proposed by the finance minister. "This change should assist in fair computation of taxable capital gains for old assets. This should also take away subjectivity, which pure inflation estimates bring to the value of long term assets," Pranay Bhatia, partner - direct tax, BDO India.