Saving LTCG Tax on Sale of Flat

Part 1:

1. You can consider alterations/reconstruction cost in old flat cost. But there has to be structural changes like new floor construction, additional room construction etc. You should also have payment receipts for above costs like for material or payment to builder. Cost for furnishing like curtains, paint, furniture cannot be added to cost.
   

2. Generally capital gains is divided in same ratio in which payment towards flat is done while purchase. So as you had paid whole amount in purchase, whole capital gain will be on your part only.

3. Please see below computation for long term capital gains and income tax. It has been assumed that additional spent has been done on constructional changes (as mentioned in above point). If figures varies, you can recompute with formula shown below.

Purchase Year = 2000-01
Purchase Cost = 2600000
Cost Inflation Index (CII) for purchase year = 406

Alteration/Construction Year = 2005-06
Alteration/Construction Cost = 500000
Cost Inflation Index (CII) for Alteration/Construction year = 497

Sale Year = 2011-12
Selling price = 10000000
CII for sale year = 785

Indexed Purchase/Construction Cost = 2600000 x (785/406) + 500000 x (785/497) = 5816832
Long term capital gain = 10000000 - 5816832 = 4183168
Income tax on capital gain = 4183168 x 20% = 836633.6

Part 2:

If possession for new house is not taken before filing of return of year in which capital gains occurred, whole gain amount has to be deposited to capital gain scheme account. Amount from this account can only be withdrawn in form of payment towards new house or after three years by paying income tax on gains.