Capital Gain Tax On Sale Of Property
Selling a property is a stressful task. Once the property owner decides to sell his immovable property, he/she calls an agent, makes a plan, and determines the total capital gain on the property sale. It requires a legal process that even makes sellers cry when they don’t receive a good profit on the selling price and property inclusions. This guide sheds light on how capital gains on selling a property are taxable in India.
What are Capital Gains on the sale of a property?
The capital gains on property sales trigger the tax implications in India. Suppose you sold a house or property inherited from your parents as a gift. Then such type of succession asset is eligible for tax exemption. No tax applies to it. But when you sell such inherited house or land or property that you have purchased your own in the past, then that type of capital gain is also not eligible for tax exemption. As it is not tax-free in India.
What are taxes on capital gains on property sales?
Taxpayers can estimate their capital gains on selling real estate property based on the holding property investment. It can be divided into two types: short-term CG and long-term CG.
- Short-term Capital Gain on property sale
The short-term capital gain on property sale is the profit earned on the transfer of a property owned for two years or less.
- Long-term Capital Gain on property sale
The Long-term capital gain on property sale is the profit earned on the transfer of a real estate property owned for more than two years.
Differentiate the short-term and long-term capital gains to evaluate your income tax on selling a house, flat, or any other immovable property. Use image 1(a) for tax rates applicable on the property sale.
|Capital Gain Tax Rates on Property||Short Term||Long Term|
|Condition||When the property owner sold a property after holding it for less than 2 years||When the property owner sold a property after holding it for more than 2 years|
|Real Estate||Slab Rate||20% with indexation|
Examine in which condition you lie. For example, suppose you have sold a house or property that you have been holding for less than two years. Then it will count in your gross total income for that financial year at the time of e-filing of your ITR. The taxes will be applicable according to the tax slab in which it will lie. Whereas if you’re sold a property after holding it for more than two years, a 20% tax rate is applicable. However, this rate does not include the indexation used to analyze the purchase price of the sold property. Likewise, it reflects the consequences of inflation on the sale.
What are tax exemptions on capital gains on property sales?
Look over the following criteria to avail of tax benefits on capital gains on a property sale:
On Short-Term Capital Gains (STCG)
The basic exemptions for short-term capital gains on property are stated below:
- The resident or non-resident of India who is aged below 60 years are exempted from paying capital gains tax on the sale of property only if the total income is under the bar of Rs. 2,50,000.
- This exemption limit will increase for Indian residents who are aged between 60 to 80 years. They are allowed to take tax relief on total income up to Rs. 3,00,000 on a property sale.
On Long-Term Capital Gains (LTCG)
Depending on the kind of reinvestment, the investors can avail of tax exemptions under sections 54, 54GB, 54F, and 54EC of the Income Tax Act in India.
Let’s understand by an example.
Suppose a salaried person needs to shift his residence because he got a promotion in a new city. Now, he has to move to another city. There may be specific reasons why he sold his old residential property and bought a new one to acquire a new shed for his family. In this instance, the objective of the seller was clear. He did not want money from the sale of old residential property. Therefore, he tried to acquire another suitable house from that purchase (cash).
In this case, Section 54 of the Income Tax Act 1961 offers relief in such hardship. According to this section, any taxpayer who sells his house or residential property and, from the sale, purchases another place to live in will get tax relief. However, taxpayers need to fulfill many terms and conditions to claim tax relief only regarding property sales.
Check out other conditions for avail of tax exemption in capital gains on the property sale:
- When there is no reinvestment in a new residential property involved for two consecutive financial years, whereas the property sold was inherited from the parents.
- When it is agricultural land that is free from any taxation rule, remember that agricultural lands are not observed as a capital asset that has any tax liability.
Also, see the following key exemptions:
|Eligibility||Any Individual / HUF||Any Taxpayer||Any Individual / HUF||Any Individual / HUF|
|Sold asset||Residential house / land||Land / building / or both||Residential except house||Residential property|
|Investment made in||NewIndia Residential house (only 1)||Specific bonds of NHAI / RECL||NewIndia Residential house (only 1)||Equity shares where assess holds 50%+ shares of the company|
|Time of purchase||Within 1 year before / 2 years after (if constructed within the time period of 3 years after transfer)||Within 6 months (after the transfer)||Within 1 year before / 2 years after (if constructed within the time period of 3 years after transfer)||Before ITR due date|
|Special case||If sold within 3 years, capital gain (that was exempted earlier) will be deducted from its cost of acquisition.||On sale of securities within 5 years, LTCA (that was exempted earlier) is taxable in the year of sale.||If sold within 3 years, capital gain (that was exempted earlier) is taxable in the year of sale.||If sold within 5 years the capital gain (that was exempted earlier) is taxable in the year of sale.|
How to calculate capital gain tax on property?
Derive how taxes on property are triggered below:
- Short-term Capital Gain on property
The short-term capital gain or STCG on the property is the profit earned on a property sale that you were owning for less than two years. Use the following formula for prudent capital gains on the property for the short term:
Sale Consideration 180000 Less: Transfer Expenses 5000 Net sales Consideration 175000 Less: Cost of Acquisition 150000 Less: Cost of Improvement 0 Short-Term Capital Gain 25000
- Long-term Capital Gain on property
A long-term capital gain or LTCG on the property is the profit earned on a property sale that you were owning for more than two years. Use the following formula for prudent capital gains on the property for the long term:
Sale Consideration as per Sec. 50C 500000 Less: Transfer Expenses 10000 Net sales Consideration 490000 Less: Indexed Cost of Acquisition(2014-2015) (250000/240*317) 330208 Less: Indexed Cost of Improvement 0 Long-Term Capital Gain 159792
Why Do You Need a Property Tax Consultant?
A property tax consultant can help Indian residents to gauge the actual capital gains on property and its taxation rules in a precise manner.
Perks of hiring a property tax consultant:
- Industry Knowledge
- Localized Expertise
- Litigation Support
Most commonly, a property tax carries all the tax information that needs to be given to the Income Tax Department of India. There are a lot more that needs to be scrutinized under the legal entity. So it’s important to take advice from them. Consult today!
Frequently Asked Questions
Q- How to avoid capital gain tax on the sale of properties?
The ideal way to save on capital gains tax on property sales is reinvesting. The whole money incurred from selling a property can be used for purchasing another residential property within a certain time frame.
Q- How to calculate property gain on property sale?
Use the following formulas for prudent capital gains on the property for short-term and long-term:(assuming sales year to be FY-2021-2022)
|Less: Transfer Expenses||5000|
|Net sales Consideration||175000|
|Less: Cost of Acquisition||150000|
|Less: Cost of Improvement||0|
|Short-Term Capital Gain||25000|
|Sale Consideration as per Sec. 50C||500000|
|Less: Transfer Expenses||10000|
|Net sales Consideration||490000|
|Less: Indexed Cost of Acquisition(2014-2015)||(250000/240*317)||330208|
|Less: Indexed Cost of Improvement||0|
|Long-Term Capital Gain||159792|
Q- How much tax on capital gains property sale?
At the present date, the long-term capital gain on property is calculated at a 20% tax rate with some additional cess and surcharge rates if applicable. However short-term capital gain from a property is charged at the normal slab rate.
Q- Should I need to buy another property to save tax?
Taxpayers should reinvest the capital gain incurred by a property sale to buy another residential property. It will let them avail of tax relief under section 54. However, they can also invest in Sec.54EC specified bonds within a certain time frame
Q- Do I need to pay a 20% tax on all capital gains?
There are various rates under the Income Tax Act based on the type of asset and period of holding such assets. However Long Term capital gains from the sale of property are charged at 20%.
Q- Do I immediately need to pay my capital gains tax?
There is no hush-hush situation to pay your capital gains tax immediately. However, there are some specified due dates on which you need to pay advance tax to avoid interest under section 234B and 234C at the time of filing the ITR.
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