Capital Gain Tax on Property

Last Updated 26th May 2020

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  • Short term capital gain on property is applicable when the property is sold before 3 years from the date of registry or issue of OC, whichever is later.
  • Long term capital gain on property is applicable when the property is sold after 3 years from the date of registry or issue of OC, whichever is later.
  • Earlier, the cost inflation index started from the base year 1981-82. However, from FY 2017-18, the base year was changed by CBDT to 2001-02.
  • The Cost Inflation Index is informed by the central government each year through a gazetted notification.

Short Term and Long Term Capital Gain Tax

Capital gain is the profit that arises from the sale of a capital asset. The profit earned from the sale of a capital asset is categorized as income. Based on the holding period of the capital asset, the capital gain is either short term or long term.
Capital gain is applicable where there is a sale transaction; instances like the inheritance of property do not attract capital gain. Some examples of a capital asset for capital gain is 'house property, land, building, trademarks, patent, vehicles, leasehold rights, jewelry, and machinery.

Property held for 2 years or more to qualify as long term asset

Tax Treatment Holding period criteria FY2017-18 onwards Holding period criteria upto FY2016-17 Tax Rate
Short terms capital gains Less than 2 years after registry or issue of OC, whichever is later Less than 3 years after registry or issue of OC, whichever is later Marginal tax rate – (upto 30%), 3% cess and upto 15% surcharge
Long Term Capital Gains 2 years or more 3 years or more 20% with indexation benefit and 10% without indexation ebenfit Exemptions available if proceeds invested in residential house or Section 54EC bonds. Indexation benchmark changed to 2001 from 1981-82 effective 2017-18

Capital gains tax on 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 classified as Short Term Capital Gain or Long Term Capital Gain.

Short Term Capital Gains Tax

Short Term Capital Gain on property is considered as a gain from selling a property which was held by you for less than 24 months. As a taxpayer, you are liable to pay tax on short term capital gain on property as per your applicable marginal income tax slab.Some key points to remember:

  • 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 RECL 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 plan to sell the sale of your property after 2 years of holding, so as to shift it to the category of Long Term Capital Gains

Short Term Capital Gain Tax Calculator

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

Long Term Capital Gain Tax

When you sell your property that is owned by you for more than three years, any gain arising from such sale will be considered 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 is allowed to set off the impact of inflation from the gains made on sale of the property so that the actual gains on property will be taxed. 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.

Key points to remember:

  • 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 long term capital gains tax reduced/exempted by investing the gain in residential property or buying bonds issued by RECL or NHAI.

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
2018-19280
2017-18272
2016-17264
2015-16254
2014-15240
2013-14220
2012-13200
2011-12184
2010-11167
2009-10148
2008-09137
2007-08129
2006-07122
2005-06117
2004-05113
2003-04109
2002-03105
2001-02100

Long term Capital Gain Calculator

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 two 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 (254)/Cost Index of FY12 (184) 4,141,304
Less: Indexed house improvement costs ( Home Improvement Expenditure in FY13 adjusted to FY16 Cost Index) i.e. Rs 2 Lakh * Cost Index of FY16 (254)/Cost Index of FY12 (200) 254,000
Gross Long Term Capital Gain 579,696

How 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 in a few scenarios exempt tax from paying long term capital gains tax.

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 have purchased or constructed a new house, you cannot sell it in less than 3 years. If you sell it before 3 years, you will not get the benefit of capital gain exemption and your sale proceeds will be taxable. These 3 years are calculated from the date of acquisition or completion of work of the new house.
  • The amount of exemption claimed is lower than the amount 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 taxable. The tenure of capital gains bonds is 5 years and the redemption is automatic. You will not get any interest after 5 years
  • You are not allowed to withdraw your money invested in Capital Gains Bonds before 5 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, maximum amount which has arisen from transfer of one or more assets during the year in which the asset is transferred and in the subsequent financial year cannot exceed more than Rs. 50 lakhs
  • These bonds are usually issued by REC and NHAI
  • 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 installment 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.

Budget 2020 Tax Highlights

Main highlights from the budget presented by Hon’ble Finance Minister Ms. Nirmala Sitharaman on 1st Feb 2020.

  • Option to the taxpayer choose between old income tax rate and slabs and the new ones.
  • New tax slabs offer reduction in applicable tax rate from 20% to 10% and from 30% to 20% in some cases.
  • In case the tax payer opts for new slabs and rates, no exemption or deduction can be claimed such as those on account of house rent allowance (HRA) investments, LIC premium, school fees, mediclaim etc.
  • Dividend Distribution Tax has been withdrawn, and dividend income shall be taxable in the hands of the recipient.
  • The Insurance coverage of deposit in a bank has been increased from Rs. 1 lakh to 5 lakh.
  • The home loan interest exemption limit of Rs. 1.5 lakhs for home loans sanctioned on and before 31st March 2020 have been extended by 1 year to 31st March 2021.

FAQs

How do I avoid capital gains tax on property?

Some of the ways through which you can avoid capital gain tax on the property are:

  • You can claim an exemption under Section 54F, by purchasing or constructing new residential property from the sale proceeds of your previous house.
  • You can choose to invest in capital gain bonds. If you invest your entire sale proceeds, then no capital gain tax would be applicable.
  • Another option is that you can invest in the Capital Gain Account Scheme. It is a scheme that lets you park your money temporarily while you hunt the right property for yourself to invest in.
How is capital gains tax calculated on the sale of a property?

The long term capital gain tax is calculated by multiplying the tax rate of 20% with the capital gain amount. On the other hand, short term capital gain tax on the property is taxed by including the short term capital gain under the total income for the individual and taxed on the basis of the applicable slab rate.

What is capital gains tax in India on property sale?

The long term capital gain tax rate is 20% for property sale. While the short term capital gain is taxed as per the applicable slab rate.

How can I save capital gains on my property?

You can save capital gain on your property by investing in another property. Under section 54, you can invest in up to two properties; before budget 2019, the benefit was available only for one. Secondly, you can also invest the sale proceeds into the construction of another property as per section 54F.

What are the rules regarding exemption of capital gains?

Three popular rules regarding the exemption of capital gain are:

  • Section 54, in which the investment is made in buying a new property.
  • Section 54F, in which the investment can be made on buying new property or construction of another property.
  • Section 54EC, in which the capital gain amount is invested in some specified bonds. These are also called capital gain bonds.
Where should I invest my money after selling my house?

The best place to invest your money after selling your house would be another property. This can be your new house, or you can rent it to generate regular income as well.

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