Capital Gains Tax on Property: Short term, Long term, calculation

Know the difference between short term and long term capital gains, check tax rates

Gains from sale of assets is called capital gains Gains from sale of property held for less than 3 years are taxable at marginal tax rate of 30% plus surcharge If property is owned for more than 3 years, long term capital gains tax @ 20% is payable. Indexation benefit is available. Exemptions are available from payment of capital gains tax if proceeds are invested in residential house or Section 54EC bonds.

Do I need to pay capital gains tax on income from sale of property?

Are you a property owner? Looking forward to sell your old property? In case you sell your property at a price higher than its purchase price, then you would be liable to pay capital gains tax on the profit you earn on the sale of your property.
For instance, if you bought a house/ land 20 years ago and you wish to sell it now, it can be expected to fetch significant appreciation to its purchase value. This indicates that you have earned "Capital Gains" on your property and hence, are liable to pay tax on these gains. The rate at which your capital gains will be taxed depends on the tenure for which you held the property and will be accordingly get classified as Short Term Capital Gain or Long Term Capital Gain.

What is Short Term Capital Gain Tax and how is it calculated?

Short Term Capital Gain on property is considered as a gain from selling a property held for less than 36 months by its owner. As a taxpayer, the seller is liable to pay tax on short term capital gain on property as per his/ her applicable marginal income tax slab. Some important points to remember for the short term capital gain tax payers are:
  • You are allowed to adjust/ reduce your sale consideration for any brokerage, commission you had paid at the time of property sale
  • You are allowed to deduct any expenditure on construction and home improvement incurred during the period you held/owned the asset
  • Benefit of indexation, i.e. adjustment for Inflation is not allowed on a property transaction classified under short term capital gain
  • No exemption or savings is allowed on short term capital gain tax u/s 54 i.e. by re-investment in property or buying capital gains bond issued by REC or NHAI
  • Liability under Short Term Capital Gains can be significantly high, if you fall in the higher income tax slab. It is advisable to time the sale of your property after 3 years of holding, whenever possible, so as to shift them to the category of Long Term Capital Gains
Illustration of Short Term Capital Gains: Mr A sold his property January 2016 at Rs. 50 lakh, which he had purchased in December 2014 for Rs. 30 lakh. As per his income, Mr. A falls in the highest tax slab of 30%. Mr. A spent around Rs. 2 lakh on house improvement during the period and also paid a brokerage of 0.5 per cent of the sale price of the house at the time of selling the house. What will be his taxable capital gains and what is the tax amount payable by him?
In this illustration, the gain achieved on this property in its 2 year holding period will be considered as short term capital gain and will be taxed as short term capital gains tax, as per his applicable income tax slab. In this case, as shown below, Mr. A's short term capital gains will be Rs. 17.75 lakhs and he is liable to pay a tax of Rs. 5,32,500 on this.
This has been explained in the table below:
Particulars Amount in Rupees
Sale price of the house 5,000,000
Less: Any transfer expenses such as brokerage, commission etc 25,000
Net Sale Consideration 4,975,000
Less: Purchase Price of the house 3,000,000
Less: House improvement costs 200,000
Gross Short Term Capital Gain 1,775,000
Less: Any exemptions available under sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G Nil
Net Short Term Capital Gain 1,775,000
Short Term Capital Gain Tax Liability for Mr. A (at his marginal tax rate slab of 30%) 532,500

What is Long Term Capital Gain Tax and how is it calculated?

In case an owner sells a property that he has owned for more than three years, the gain he makes on selling the property will be treated as "Long Term Capital Gain". Long term capital gain is calculated as the difference between net sales consideration and indexed cost of property. The benefit of indexation has been provided to set off the impact of inflation from the gains made on sale of the property so that the seller is taxed only on true gains that he made from the property. This is based on the logic that value of money decreases constantly because of inflation and hence, it is unfair to tax a long term property holder for the nominal gains accruing to him only because of inflation.
Some important points to remember for the Long Term Capital Gain tax-payers are:
  • Current Long Term Capital Gains tax rate is 20 %
  • You are allowed to adjust your sale consideration for any brokerage, commission you had paid at the time of property sale
  • You are allowed to deduct any expenditure on construction and home improvement incurred during the period you held/owned the asset. Similar to the indexation benefit available on the purchase price, any house improvement expenditure is also allowed to be adjusted as per the Cost Inflation Index published by Reserve Bank of India.
  • You can get your loan term capital gains tax reduced/exempted u/s 54 i.e. by investing the gain in residential property or buying capital gains bonds issued by REC or NHAI.

About Cost Inflation Index and its Impact on Capital Gains

The value of money decreases constantly because of inflation. Thus, income tax department in India allows indexing the cost price of property, so as it to adjust it for inflation related price appreciation. The cost inflation index is upgraded by Reserve Bank of India in every financial year. The table below captures the Cost Inflation Index since its base year 1981-82 (Base Year = 100)
FINANCIAL YEAR COST INFLATION INDEX FINANCIAL YEAR COST INFLATION INDEX
2015-16 1081 2014-15 1024
2013-14 939 2012-13 852
2011-12 785 2010-11 711
2009-10 632 2008-09 582
2007-08 551 2006-07 519
2005-06 497 2004-2005 480
2003-2004 463 2002-2003 447
2001-2002 426 2000-2001 406
1999-2000 389 1998-1999 351
1997-1998 331 1996-1997 305
1995-1996 281 1994-1995 259
1993-1994 244 1992-1993 223
1991-1992 199 1990-1991 182
1989-1990 172 1988-1989 161
1987-1988 150 1986-1987 140
1985-1986 133 1984-1985 125
1983-1984 116 1982-1983 109
1981-1982 100
Illustration: Mr A sold his property in January 2016 at Rs. 50 lakh, which he had purchased in December 2011 at Rs. 30 lakh. As per his income, Mr. A falls in the 30% marginal tax rate slab. Mr. A spent around Rs 2 lakh on house improvement in January 2013 and also paid a brokerage of 0.5 per cent of the sale price of the house at the time of selling the house. What will be his taxable Capital Gains and what is the tax amount payable by him?
In the above illustration, the buyer held the property for more than three years and hence, the gain earned on selling this property will be considered as long term capital gain. The long term capital gain will be taxed at the rate of 20 %.
Mr A will be liable to pay a tax of Rs 1,18,007 on his Long Term Capital Gains of Rs 5,90,034 on this property transaction.
The calculation for long term capital gain with indexation benefits has been explained in the table below:
Particulars Amount in Rupees
Sale price of the house 5,000,000
Less: Any transfer expenses such as brokerage, commission etc 25,000
Net Sale Consideration 4,975,000
Less: Indexed acquisition cost of the house (Purchase Price in FY12 adjusted to FY16 Cost Index) i.e. Rs 30 Lakh * Cost Index of FY16 (1081)/Cost Index of FY12 (785) 4,131,210
Less: Indexed house improvement costs ( Home Improvement Expenditure in FY13 adjusted to FY16 Cost Index) i.e. Rs 2 Lakh * Cost Index of FY16 (1081)/Cost Index of FY12 (852) 253,756
Gross Long Term Capital Gain 590,034

Are there any options to save tax on long term capital gains?

A property is a wealth which is created over a life and typically, is sold to amplify your existing wealth which justifies levying a tax on it. Also, tax from capital gains directly affects investment motives. Indian Income tax rules, however, contain provisions, that allow tax payers to be exempted from paying the long term capital gains tax under some scenarios.
1. Under section 54, sell a residential property and invest the gains to buy a new residential property and claim exemption on capital gains tax.
Under section 54, you can claim exemption on capital gains tax exemption, if you invest full or part of your sale proceeds of a residential property in India in another residential property in India. Rules for exemption are as follows:
  • Exemption is available to individuals and HUFs and is available for one residential property
  • The capital gains from sale of a residential property can be set off against the purchase of new residential house. The property sold and purchase should be in India
  • The new residential house can be bought either one year before the sale of old house or within two years from the date of sale of the previous property. In case you plan to construct a house, the construction of the house should be completed within 3 years from the date of sale of the previous property
  • Once you purchase or construct the new house, you cannot sell it in less than 3 years. If you sell it before 3 years, the capital gains exemptions would be withdrawn and you will be liable to pay the tax. These 3 years are calculated from the date of acquisition or completion of work of the new house.
  • The amount of exemption claimed is the lower of capital gains or the cost of new house purchased.
2. Under section 54 F, sell any asset other than a residential property and claim capital gains tax exemption by purchasing a residential house
Rules for exemption under Section 54 F are as follows:
  • Exemption available to individuals and HUFs
  • The new residential house can be bought either one year before the sale of old house or within two years from the date of sale of the previous property. In case of construction of a house, the construction of the house should be completed within 3 years from the date of sale of the previous asset
  • Exemption available only if the taxpayer does not own more than one residential house on the date of transfer of such asset other than the one that he has bought to claim deduction under Section 54 F
  • If the whole sale consideration is not invested and only a part sale consideration is invested in the purchase of new property, the amount of exemption shall be provided proportionately i.e. Amount Exempt= Capital Gain X Amount Invested/Net Sale Consideration
3. Under Section 54 EC, sell a long term capital asset and get capital gains tax exemption by investing in 54EC Capital Gain Bonds
This section comes in handy for tax payers who have sold their assets and are liable to pay long term capital gains tax, but are unable to take benefit from the rules under section 54 by buying another residential property. These tax payers can save tax by investing their gain in Capital Gains bonds. Rules for exemption are as follows:
  • You have to invest the "capital gained" money into these bonds within six months of selling your property
  • The money invested into these bonds will be exempted from the capital gain tax
  • TDS is not applicable on money invested in capital bonds. However, interest income from capital gains bonds is taxableThe tenure of capital gains bonds is 3 years and the redemption is automatic. You will not get any interest after 3 years
  • You are not allowed to withdraw your money invested in Capital Gains Bonds before 3 years from the date of investment
  • The face Value of bond is 10,000 and you need to invest a minimum of Rs 20,000 in these bonds
  • These bonds are usually issued by REC and NHAI with an interest rate of 6%
  • These bonds can be held in either demat or physical form
  • These bonds cannot be pledged as collateral for obtaining loans
4. Park your capital gains amount in capital gains account in case you are unable to purchase a property before your Income Tax filing date
Capital gains account scheme is available as a temporary method to save capital gains tax. This scheme is for people who are unable to invest in a new property before filing the income tax return. The scheme was introduced in 1988 and under the scheme, a capital gains account may be opened only with specified banks or institutions. The taxpayer can put his gain on his asset transaction in this account for three years. He can withdraw the amount invested for purchasing or constructing his new house, as he takes the decision to do so within the next three years. Features of the scheme are as follows:
  • The taxpayer should mention that he has opted for the scheme in his Income Tax Return
  • You can make the deposit anytime in instalment or lump sum before the due date of filing income tax return
  • Two types of accounts will be opened under this scheme. One account will enable you to withdraw money as per your requirements and other account will be like a fixed deposit
  • Money withdrawn from any account has to be used within 2 months for specified use to avail capital gains exemption
  • The deposited amount in this scheme can't be used as mortgage for any loan
  • The interest on capital gains account is taxable. TDS will be deducted as per rules
5. Set off your capital gains against any capital loss carried forward from previous years
Income Tax Act in India allows that if a tax payer has any capital loss that have incurred earlier and carried forward, he can set off his capital gains against those losses and hence reduce his tax liability. Some key points to remember are:
  • Short term capital gains can be set off against short term capital loss and long term capital gain can be set off against long term capital loss only
  • The capital loss can be carry forward for a period of 8 years
  • The capital loss carried forward should have been mentioned in income tax returns.
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