Capital Gain Tax on Property

Introduction

Capital gains are the profits earned from the sale of an asset that has increased in value over time. This asset can be anything from stocks, real estate, or artwork. The capital gain is calculated as the difference between the purchase price and the sale price of the asset. If the sale price exceeds the purchase price, the investor has made a capital gain.

What is Long Term Capital Gain Tax on Property

Long-term capital gain tax on property or the capital gain tax on the sale of the property is the tax paid on the profit earned from the sale of a property that was held for more than one year. Long-term capital gain tax is calculated based on the profit earned from the sale of the property after deducting the indexed cost of acquisition and improvement.

The current long-term capital gains tax on property in India is 20%, with an additional surcharge of 4% for individuals with a total income of more than INR 1 crore. However, in the case of agricultural land in India, the long-term capital gain tax on the sale of the property is 20% with indexation or 10% without indexation, whichever is lower.
 

Tax Rate Chart for Income on Sale of Assets

When is a Capital Gain From Property Deemed to be Long Term?

In India, a capital gain from the sale of a property is deemed to be long-term when the owner holds the property for more than two years. The capital gain is considered short-term if the owner sells the property within two years of purchase. To determine the holding period of the property, the date of acquisition is considered the starting point, and the date of sale is considered the endpoint. 

If the property is inherited, the holding period is calculated from the date of acquisition by the previous owner. However, taxpayers have to pay a lower capital gains tax on the sale of the property if the property is deemed long-term in comparison to the short-term capital gains tax on property. 
 

What is the formula that is used to calculate capital gains?

Here is the formula to calculate short-term and long-term capital gains tax on the sale of property: 

Short-term Capital Gains Formula: 
Sale Consideration - Cost of acquisition - Cost of improvement (if any) - Expenses incurred for the sale of the Asset.

Short-term Capital Gains Formula: 
Sale consideration - Indexed cost of acquisition - Indexed cost of the improvement (if any) - Expenses incurred for the sale of the Asset
 

Calculation of Long-Term Capital Gains from Property

Here is a detailed table to provide a clear understanding of the long-term capital gains tax on the sale of the property.

Note: Indexation calculates the asset's cost after factoring in inflation. 

The table below gives the cost inflation index for the past five years

Tax Implications on LTCG on Property

In India, the long-term capital gains tax on the sale of property means is 20% on every property sold after 1st April 2017. The capital gains tax on the property is with the addition of cess and surcharge. Tax implications depend on several factors, including the holding period, the cost of acquisition, and the type of property sold. 

Here are some points that affect the long-term capital gains tax on the sale of property: 

●    The government allows taxpayers to include brokerage charges or commissions they have paid to acquire the asset in their sale consideration. 

●    The taxpayers can deduct any additional expenses incurred for home improvement after acquiring the asset. 

●    Taxpayers can claim a deduction for capital gains from property under Section 54, 54B, 54EC. 
 

Tax Exemptions on Long-Term Capital Gains on Property

LTCG on a property is subject to taxation in India, but the Income Tax Act provides some exemptions to help reduce the tax liability. These exemptions are available if the proceeds from the sale are invested in certain specified assets within a specified period. The most common exemption available is under Section 54 of the Income Tax Act, which allows taxpayers to claim an exemption on LTCG tax liability if they use the sale proceeds to purchase another residential property within two years.

Tax Exemptions Available under Section 54

If you sell a residential property and use the proceeds to purchase another residential property within two years, you can claim an exemption under Section 54 of the Income Tax Act. The exemption equals the LTCG or the amount invested in the new property, whichever is lower. 

To avail of the exemption, the assessee must fulfil the following conditions.

●    The assessee must purchase the new properties either one year before the sale of the existing property or two years after its sale. 

●    Although an assessee can claim the exemption for purchasing new properties, the exemption applies to the expenses incurred on constructing a property. Here, the construction must complete within three years from the date on which the assessee sells the property. 

●    The exemption will be reversed if the assessee sells the new property within three years of purchase.

●    To avail of the exemption, the assessee must invest the profit gained from the sale of the property and not the sale proceeds. It means that the price of the new properties should not exceed the previously acquired capital gains. Hence, the tax exemption only applies to the number of capital gains and not the entire sale proceeds. 
 

Tax Exemptions Available under Section 54EC

Under Section 54EC, taxpayers can claim an exemption on Long Term Capital Gains (LTCG) tax liability by investing the sale proceeds in specified bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months of the sale. The exemption is limited to Rs. 50 lakhs per financial year. 

The taxpayer must hold the bonds for a minimum of five years from the date of investment. The exemption claimed will be reversed if the bonds are sold before this period.
 

Tax Exemptions Available under Section 54B

Under Section 54B of the Income Tax Act, taxpayers can claim an exemption on Long Term Capital Gains (LTCG) tax liability by investing the sale proceeds in agricultural land. The exemption under Section 54B is available to individuals and HUFs who have sold a long-term capital asset other than a residential property and have incurred LTCG from such a sale. 

Once purchased, the assessee must use the land for agricultural purposes for a minimum period of two years immediately following the date of purchase. The maximum exemption available under Section 54B is up to Rs. 50 lakhs.