Capital Gain Tax on Sale of Property – The Complete GUIDE

OK. You want to sell your property. You have done the market study, set the price, started advertising, engaged a broker and made all paperwork ready. But are you aware of tax implications that arise from any profit or loss that you will make on your investment. Many sellers ignore such tax implications which may later cause lot of problems. Moreover, nitty-gritties of Capital Gain Tax are unclear to most people. Well if you are reading this, you have already taken the first step towards making huge savings. In this guide, we explain all you need to know about Capital Gain Tax on Sale of Property and how you can get exemptions. After reading this guide, it is our promise that you will be able to handle your capital gain tax on property in a much smarter way.

What is Capital Gain & Capital Loss?

Capital Gain is the profit that results from sale of a capital asset such as Property, Share, Bond, Gold etc. where the sale price of asset exceeds its purchase price. Conversely, Capital Loss is the loss that results when the selling price of the asset is less than its purchase price.

Capital Gains are subject to tax under Income Tax Act, depending on whether the gains were short-term or long- term. In this guide, we are focusing only on the capital gain tax on sale of property.

Short Term and Long Term Capital Gain Tax on Sale of Property

Short Term Capital Gain Tax

If the property is sold within 36 months from the date of acquisition, any gain from the sale proceeds will be termed as short term capital gain. Short term capital gains are added to your income and you have to pay tax as per your income tax slab. For eg., if you are in 30% tax slab, your short term capital gains will be taxed at 30%.

Long Term Capital Gain Tax

If the property is sold after 36 months from the date of acquisition, any profit will be called as long term capital gain. Long term capital gains are taxed at the flat rate of 20%. However, you can save this tax as per various provisions available under IT Act.

Before we get into tax exemptions available for long term capital gain, let us see how to calculate capital gain.

capital-gain-tax-on-sale-of-property

How to calculate Capital Gain?

Short Term Capital Gain and Long Term Capital Gain are calculated by following formulae,

Short Term Capital Gain = Sale Consideration – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

Long Term Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer + Exemptions)

Terms used in above formulae are explained below:

Sale Consideration

The total amount that the seller/ transferor receives or is entitled to receive as consideration for the sale of property.

Fair Market Value

The price that a property would fetch if sold in the open market on relevant date.

Expenses on Transfer

Any expenses incurred, directly or indirectly, during the transfer of property. Transfer expenses may include Brokerage, Advertisement Costs, Stamp Duty & Registration Charges, Legal Costs etc. However, any expense that is claimed under any other clause of IT Act cannot be claimed under Capital Gain tax deduction.

Cost of Acquisition

In cases where the property is acquired directly by the assessee, cost of acquisition is considered as the actual purchase price of property.

In cases, where the property is acquired by means of gift/ succession/ inheritance etc., cost of acquisition is taken as the cost at which the previous owner of property acquired it. If the purchase price of property for previous owner cannot be ascertained, cost of acquisition shall be considered as Fair Market Value of the property on which the property was transferred to previous owner.

Indexed Cost of Acquisition

While calculating Long Term Capital Gain, you can reduce your tax liability by indexing your cost of acquisition and cost of improvement as per cost inflation index. This means your gains will be reduced to adjust for inflation. Sometimes, after adjusting for inflation, you may have capital loss.

Indexed cost of acquisition is calculated by the formula,

Indexed Cost of Acquisition = Actual Purchase Price * (CII of Year of Sale/ CII of Year of Purchase)

where, CII is Cost Inflation Index

Cost of Improvement

All capital expenses incurred in making any improvements, additions or modifications to the property after it became property of the assesse are deductible under cost of improvement. In cases, where property is acquired by means of gift/ succession/ inheritance etc., any expenditure incurred by previous owner shall also be treated as cost of improvement. Only capital expenses are considered under cost of improvement and routine expenses incurred on repair and maintenance cannot be considered under Cost of Improvement.

Indexed Cost of Improvement

Just like indexed cost of acquisition, indexed cost of improvement is the inflation adjusted expenses incurred for property improvement. It is calculated by the formula,

Indexed Cost of Improvement = Actual Cost of Improvement * (CII of Year of Sale/ CII of Year of Improvement)

To know more about Cost Inflation Index and how to calculate Indexed Cost of Acquisition & Indexed Cost of Improvement under various scenarios, check our detailed article Cost Inflation Index – Capital Gain Index.

Exemptions allowed on Capital Gain Tax

Under section 54, IT Act grants exemptions from long term capital gains tax, if certain conditions are satisfied. Following are the exemptions allowed:

Long Term Capital Gain – ExemptionU/S 54U/S 54BU/S 54ECU/S 54F
Who can claim exemptionIndividual/ HUFIndividualAny personIndividual/ HUF
Eligible assets soldA residential house property (minimum holding period 3 year)Agriculture land which has been used by assessee himself or by his parents for agriculture purposes during last 2 years of transferAny long term assetAny long term asset (other than a residential house property) provided on the date of transfer, the taxpayer does not own more than one residential house property from the assessment year 2001-02 (except the new house)
Assets to be acquired for exemptionResidential house propertyAnother agriculture land (urban or rural)Bond of NHAI or RECResidential house property
Time limit for acquiring new assetsPurchase: 1 year back or 2 year forward
Construction: 3 years forward
2 years forward6 months forwardPurchase: 1 year back or 2 year forward
Construction: 3 years forward
Exemption AmountInvestment in the new assets or capital gain, whichever is lowerInvestment in the agriculture land or capital gain, whichever is lowerInvestment in new assets or capital gain, whichever is lower (Max. Rs. 50 lacs in Fin. Yr.)Investment in new assets or (Net Sale Consideration * Capital Gain)
Whether “Capital Gain Deposit Account Scheme” applicableYesYesNot ApplicableYes

How to save Long Term Capital Gain Tax on Sale of Property (Residential)?

Tax saving by purchasing another property

If you have sold a house property, then under section 54 you can claim exemption on long term capital gain tax on sale of property by satisfying following conditions:

  • Use the entire Capital Gain amount to either buy another residential property within 2 years, or
  • Construct a residential house in 3 years, or
  • You can claim exemption if you have already bought a second house within last one year from the date of selling of current house.

In case, you have sold land, you can avail exemption under section 54F (on sale of any asset other than house). Capital Gain amount should be invested only in a house property and not in any other type of property or land. Also, you should not own more than one house property.

Capital Gains Account Scheme

Till the time you purchase a residential property as per section 54 or 54F, you can deposit your Capital Gains amount in a special account under Capital Gains Account Scheme (CGAS). Deposits under CGAS are exempted from tax, provided these conditions are met:

  • CGAS deposit must be done before you file your IT returns for the financial year in which you sold the property.
  • You need to buy a property within 2 years or construct a house within 3 years from date of selling.
  • Funds withdrawn from CGAS have to be used within 60 days.
  • Interest on CGAS deposit is taxable.

If you do not utilize the deposit amount in CGAS within 3 years, you will have to pay long term capital gain tax.

Tax saving without investing in property

If you do not want to invest in a property, you can still avail tax exemption. Under section 54EC, you can get exemption on capital gains tax if you invest long term capital gains in bonds of National Highway Authority of India (NHAI) and Rural Electrification Corporation Limited (REC) for minimum 3 years within 6 months of selling your house property. The maximum limit of investing in NHAI and REC bonds is Rs. 50 lakhs.

Capital Loss

In some cases, an assessee may incur capital loss i.e. when sale consideration received for a property is less than the cost of acquisition and improvement. Here are some salient features of Capital Loss:

  • Capital loss can be incurred for short term asset as well as long term asset.
  • It cannot be set off against positive income under any head.
  • It can be carried forward to next year but can be set off only against Capital Gains, whether from house property or from any other long term asset.
  • Any unabsorbed loss can be carried forward upto 8 years. However, you have to file a loss in your income tax returns, failing which you will not be allowed to set-off unabsorbed loss.

Long Term Capital Gain for NRIs

For NRIs also, capital gains tax rules are same if capital gains are invested in a residential property in India. This means if an NRI sells a residential property in India after 3 years from acquisition, he can get exemption on Long Term Capital Tax, if he utilizes capital gain amount to

  • buy another residential property in India within 2 years, or
  • construct a house within 3 years, or
  • if he has already bought a house in last 1 year.

If he is not able to invest capital gains in a residential property within stipulated time, the amount will become taxable.

In case, an NRI wants to invest long term capital gain amount in another country, say US, he will have to pay long term capital gain tax which will be calculated by taking into account indexed cost of acquisition and improvement.

We hope that you will now make full use of exemptions available for capital gain tax on sale of property.

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Team AY is the editorial team of AssetYogi led by Mukul Malik. A small group of Real Estate enthusiasts, Team AY works hard everyday on a vision of making high quality Real Estate knowledge freely available.

28 comments

  1. Is there a way to avoid taxes on short term capital gain arising from the sale of a property bought 15 mths back? I don’t have short term loss to offset.

  2. Hi,
    can parking charges , EDC & IDC charges , club membership charges , electricity meter charges BE INCLUDED in cost of acquisition of an apartment or not.

    Thanks

    DEEPAK BHATIA

  3. Sitapati Row Kasturi

    Recently I sold my flat and made a capital gain of approximately 70 lakhs. I would like to invest 50 lakhs in NHAI or Rural Electrification bonds to avoid part of the capital gain tax. Now I want to know whether I have to pay capital gain tax if I withdraw this 50 lakhs after three years of investment in these bonds. Can I withdraw and use this amount as I please without paying capital gain tax on this amount after three years.

  4. Who pays the Short Term Capital gains tax? Is it the buyer (on behalf of seller) or the seller? I am an NRI and planning to sell a property.

  5. Hi, I am an NRI selling my apartment (long term investment) and have a couple of quick questions –

    – Can we reinvest the sale proceeds to pay off the loan that my wife already has on another apartment in India, to avoid the capital gains tax? Does it have to be a new property purchase or new construction?

    – Would you know any details (how much, percentage, etc,) about the foreign tax credit I might get in the U.S. if I were to pay the capital gains tax in India?

    – And lastly, the best way to transfer these capital gain proceeds to the U.S.?

    Thank you.

  6. Hi, Many thanks for the very informative website. Recently, I have sold our property in Mumbai for Rs. 73 Lacs, The capital gain after indexation is around 39 Lacs, We are purchasing a new house which cost only for Rs. 30 lacs, The remaining 9 lacs of capital gain can we invest in Government Bond? Also, wouldl like to know, new purchased property should only be on the sellers name or it can be purchased on joint name. Thanks in advance.

    Regards,

    Manish

    • Yes Manish, you can invest remaining 9 lacs in Govt. Bonds. You will have to invest in seller’s name.
      Hope it helps.

  7. Hi

    If I sell a Commercial Plot and utilise the funds to buy a residential apartment, will I have to pay tax?

  8. Hi,

    I am an NRI and selling a property in India which I purchased 12 years ago. When the property was purchased I was and Indian resident and not a NRI.

    I will calculate my Capital gain on the basis of indexed cost. I want to invest my capital gain in NHAI or REC bond for 3 years to avoid long term capital gains tax.

    Can NRI’s use this option? Pls confirm.

  9. I sold my property in June 2013, after calculating index value my capital gain was 35 lakhs and I bought a land for 40 lakhs on my wife’s name and constructed flats with my remittance money. Now how to take out my remittance money and ready to register one flat on my name for capital gain. Please suggest a solution.

  10. My father sold his ancestral property which was purchased in 1949.At that time when my grand father purchased it was hardlly 3000. Now My father is selling it at 1.6 cr. This is the only house we have.We have lots of hand loans to be cleared.How to avoid captial gain tax? Please help

    • Hi Chandrashekhar

      The best way to avoid capital gains tax in your case is to purchase another residential property with the sale proceeds.
      However, as you said that you also want to clear off few loans, then that amount will become taxable. But you can calculate indexed cost of acquisition and cost of improvements over the years to minimise your tax liability.

      Please go through this article in more detail and also read:
      http://assetyogi.com/cost-inflation-index-capital-gain/

      Hope it helps!

  11. I Have recently sold my house for 61lakhs, and purchased new Flat for 51 lakhs,
    So i have about 10 lakhs capital gain.
    If i invest this capital gains in bonds for 3 years . After maturity of bond will that 10 lakhs amount taxable?

  12. Hi Mukul,

    Thanks for sharing this information. I have recently sold my property on a profit and I am planning to buy a new one with the money. And it will probably take around 6 to 9 months to buy the new property.
    So I wanted to know is it possible that I can use the money that I have got from selling the property to invest in Fixed Deposit for 6 months and later on buy the new property without getting the Long Term Capital Gain Tax on it.

    Regards,
    Saurabh

    • Hi Saurabh

      If you want to avoid long term capital gains tax, you should deposit the amount in a Capital Gains Account only.
      Investing in FD will make capital gains taxable.

      Hope it helps.

  13. I purchased an apartment in April 2014 at 40 lakhs. I want to sell it now at 60 lakhs and invest the entire 60 lakhs on another apartment (under construction). Will this set of transactions attract any capital gain tax?

  14. Great work sir… Informative

  15. Is it possible that after selling of residential house for 2.5 crore after 26years of acqisition the net remaing gain of Long Term Capital Gain after cost indexing can be used to purchase a small house so that payment of Long term capital Gain tax on remaing profit can be also saved?

    • The remaining portion of capital gains which is not invested in residential property will be taxable.

      • Dear Mr, Muker,
        After 36 months of purchasing a residential property for CGTax benefit, can this be now converted to a commercial one

  16. Hi Mukul,

    You run a very good informative website. I am a US citizen and moving back to my hometown in Delhi next month . I live in a 280 sq yards house in Safadarjung Enclave.

    I am looking to build another floor on the top , so can you please guide me through the process to get all permissions and approvals. Also suggest an architect or interior designer.

    Thanks,
    Gaurav

    • Thanks for showing interest in us Gaurav. However, at this point in time we are not offering services that you are enquiring about.
      In Delhi, generally floors are built by local builders either on contract basis or collaboration basis. You can enquire from some of these local builders who can take up the end to end job including interiors.

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