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 – Exemption U/S 54 U/S 54B U/S 54EC U/S 54F
Who can claim exemption Individual/ HUF Individual Any person Individual/ HUF
Eligible assets sold A 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 transfer Any long term asset Any 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 exemption Residential house property Another agriculture land (urban or rural) Bond of NHAI or REC Residential house property
Time limit for acquiring new assets Purchase: 1 year back or 2 year forward
Construction: 3 years forward
2 years forward 6 months forward Purchase: 1 year back or 2 year forward
Construction: 3 years forward
Exemption Amount Investment in the new assets or capital gain, whichever is lower Investment in the agriculture land or capital gain, whichever is lower Investment 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” applicable Yes Yes Not Applicable Yes

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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