Capital Gain Tax On Sale Of Property

What is Capital Gains Tax?

The profit or gains received from the sale of a ‘capital asset’ is known as capital gains tax in India. Examples of such capital gain asset are land, trademarks, machinery, jewellery etc. These gains are taxable at a certain rate in the year in which the transfer of the capital asset takes place. There are two types of capital gains: Short term capital gains (STCG) and long term capital gains (LTCG).

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What are Capital Gains Tax on the Sale of a Property?

Capital gains on the sale or transfer of a property in India refer to the profit an individual makes upon selling it a property at a price higher than its purchase cost. This profit is considered income and is subject to tax on the sale of property under the Income Tax Act. Capital gain tax on the property is specifically on the monetary benefit made form the sale or transfer of residential properties or lands by an individual for whom such income is not their main domain of earning.

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Long-Term Capital Gain and Short-Term Capital Gain

As per the Indian Income Tax Act, any capital gain arising from the sale of property is subject to tax. Property for the purpose of capital gain tax includes residential property, automobiles, land, buildings, gold, equity shares, and equity-oriented funds, etc.

Capital Gain Tax on sale of property can be divided into two types: short-term capital gain (STCG) and long-term capital gain (LTCG). This classification has been done on the basis of how long do you hold the property.

Short-term Capital Gain on Property Sale

If the asset is sold within 24 months of its acquisition, it is termed as short-term capital gain (STCG).

Long-term Capital Gain on Property Sale

If you sell the property after holding it for more than 24 months, the profit will be termed as long-term capital gains (LTCG).

Given below is the difference between short-term capital gain (STCG) and long-term capital gain (LTCG) on the sale of property, flat or any other immovable property.

For example, suppose you have sold a house or property that you have been holding for less than 24 months. 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’ve sold a property after holding it for more than 24 months, 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.

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LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison

Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.

Taxation for mutual funds

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What are Tax Exemptions on Capital Gains on Property Sales?

First of all, most of the tax exemptions available from capital gains on property are only allowed in the case of long-term capital gains on property. If you have a short-term capital gain from the sale of property, then such gains will be added to the total income and taxed at the applicable slab rates.

Given below are the criteria to avail of tax benefits on capital gains on property sale:

Exemptions on Short-Term Capital Gains (STCG) on Sale of Property

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 and 80 years. They are allowed to take tax relief on total income up to Rs. 3,00,000 on a property sale.

Long-Term Capital Gains (LTCG) on Sale of Property

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.

Exemptions from Capital Gain Tax on Sale of Property

Tax Exemption under Section 54

To qualify for an exemption under Section 54, an individual must meet the following criteria:

• Classification as Long-Term Capital Asset: The asset must be classified as a long-term capital asset.
• Residential House Sale: The asset sold must be a residential house, and the income from such a house should be chargeable as "Income from House Property".
• Purchase or Construction Timeline:
  • The seller must purchase a residential house either within 1 year before or 2 years after the date of sale/transfer.
  • If constructing a house, the seller has up to 3 years from the date of sale/transfer.
  • In the case of compulsory acquisition, the period for acquisition or construction is determined from the date of receipt of compensation (original or additional).
• Location of New House: The new residential house must be located in India. Purchasing a house abroad does not qualify for the exemption.
• Capital Gains Tax Exemption Limit: From April 1, 2023, the capital gains tax exemption under Section 54 to 54F is capped at Rs. 10 crore. Previously, there was no such limit.
• Cumulative Conditions: All conditions above must be met to avail of the exemption. If any condition is not fulfilled, the exemption cannot be claimed.

From the Assessment Year 2020-21 (FY 2019-20), an exemption is available for the purchase of up to two residential houses in India. This exemption is subject to the capital gain not exceeding Rs. 2 crore and can be claimed only once in the seller's lifetime.

Tax Exemption under Section 54F

To avail an exemption on capital gains tax on property in India under Section 54F, consider these parameters:

Reinvest the entire capital gain amount. If the entire amount is not reinvested, the exemption is calculated based on the amount invested. The calculation formula is:

Tax Exemption under Section 54EC

For an exemption under Section 54EC, an individual must meet the following conditions:

If unable to invest before filing taxes for that year, deposit the amount in a PSU bank or any bank listed under the Capital Gains Account Scheme (1988).

Convert this deposit into an investment within 2 years from the date of sale. Otherwise, it will be considered a short-term capital gain in the year the period lapses.

Tax Exemption under Section 54B

This exemption applies only to capital gains from the sale of agricultural land outside of a rural area. A rural area is described as follows:

To qualify for this exemption, the following conditions must be met:

If there is a delay in investment, deposit the amount in a bank under the long-term capital gains scheme.

Complete the investment within 2 years, or it will be treated as a short-term capital gain in the year of expiry.

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Capital Gain Tax Exemptions under Section 54, 54F, 54EC, and 54GB

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How to Calculate Capital Gain on Property?

Short-term Capital Gain Tax Computation on property

The short-term capital gain or STCG on the property is the profit earned on a property sale that you have owned for less than 24 months.
Use the following formula for prudent capital gains on the property for the short term:

Long-term Capital Gain Tax Computation on property

A long-term capital gain on the property is the profit earned on a property sale that you have owned for more than 24 months.
Use the following formula for prudent capital gains on the property for the long term:

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Set Off & Carry Forward of Losses on Sale of Immovable Property

The loss incurred from the sale of an immovable property, held for a period exceeding 24 months, is classified as a Long-Term Capital Loss (LTCL). According to income tax regulations governing the set-off and carry forward of losses, the taxpayer has the option to offset LTCL against Long-Term Capital Gains on property exclusively. Any remaining loss can be carried forward for up to 8 years, with the provision to set it off only against LTCG during this period.

On the other hand, if the immovable property is held for up to 24 months, resulting in a loss upon sale, it is categorized as a Short-Term Capital Loss (STCL). In this scenario, the taxpayer has the flexibility to set off STCL against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Similarly, any unabsorbed loss can be carried forward for 8 years and applied against STCG and LTCG only during this period.

Remember! If you want to carry forward your losses, you must file an ITR. The ITR filing season is already here. File your ITR and reduce your capital gain tax liability.

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