Many people own assets in the form of property. It is significant to take into account the applicable capital gains tax on the sale or transfer of such property.
Capital gains can be defined as profits or gains generated from the sale or transfer of any capital assets. These capital assets are further defined as any property – movable or immovable, tangible or intangible – that is legally owned by an individual.
Few examples of capital assets are residential properties, equity shares, equity-oriented funds, automobiles, land plots, buildings, gold, etc. Any profit generated out of the sale of these assets falls under the category of capital gains and is taxed under the income head “Capital Gains.”
In case your primary mode of income resides in selling and purchasing capital assets, profits from the same will be considered under the head “Income from business or profession.”
Capital gain tax on the property is levied specifically on the monetary profit from the sale or transfer of residential properties or lands by an individual who does not consider it a profession or such income is not his/her main domain of earning.
Capital assets are classified into two types based on their holding period by the seller – long-term capital assets and short-term capital assets.
Capital gains from the respective capital assets fall under that specific category of gains – long-term capital gain or short-term capital gain.
Any asset that has been held by an individual for 36 months or less before sale/transfer is considered a short-term capital asset. In the case of immovable properties, i.e. homes, the tenure to qualify as a short-term capital asset is 24 months or less, provided the selling process takes place after 31st March 2017.
Any asset that crosses the threshold of 36 months or 24 months, depending on the object, is considered a long-term capital asset. If you sell a housing property after holding it for 24 months or more, profits from such a transaction will be considered long-term capital gains.
Capital gain tax on property is taxed differently across these two types.
The tax rate on long-term and short-term capital gains can be described as follows –
|Type of gain
|If a property is sold within 24 months of acquiring it, after 31st March 2017.
|Short-term capital gain
|The gain will be added to the existing income of such individual and taxed as per the applicable tax slab.
|If a property is sold after 24 months, post 31st March 2017
|Long-term capital gain
To calculate a short-term capital gain, you should consider the following factors –
These are the following factors considered to calculate long-term capital gain –
In the case of long-term capital gains, the cost of acquisition and cost of alteration is indexed to adjust against inflation. Cost indexation is done for the benefit of the assets concerning capital gain tax on sale of property, because otherwise, the profit would be inflated, incurring more tax. Such indexation number is also called the Cost Inflation index (CII).
Suppose Mr X sells a residential property for Rs. 1 Crore in March 2018. The property was acquired in April 2005 for Rs. 25 Lakh. Assuming no renovation was done on it, the indexed cost of that house in 2018 would be Rs. 58, 11, 970, resulting in a capital gain of Rs. 41, 88, 030.
An individual can avail of any of the four exemptions depending on the kind of reinvestment he/she does post receiving the amount of consideration from such long-term capital gain. The following sections under which tax exemptions would be available are – 54, 54B, 54F, 54EC.
An individual needs to meet the following criteria before availing an exemption under this section –
To avail exemption on capital gain tax on property in India, these following parameters should be considered –
To avail this exemption under capital gain tax on property on the entire amount of capital gain, an individual needs to reinvest the whole amount received as consideration. In case he/she fails to achieve this, then exemption on capital gain is calculated on the basis of the amount invested. The following calculation takes place in that situation –
Exempted amount = (Capital Gains * cost of new house)/ net consideration amount
Exemption on capital gain tax on property is available to an individual upon meeting the following conditions –
In case the individual is unable to invest before filing tax for that year, he/she can deposit the amount in a PSU bank or any other bank listed under the Capital Gains Account Scheme (1988). In that case, exemption on capital gain tax on the sale of property will be considered legitimate. However, such a deposit needs to be converted to an investment within 2 years from the date of sale, failing which it will be considered a short-term capital gain in the year of period lapse.
This exemption is only available on capital gains from a sale of land for an agricultural purpose outside of a rural area.
A rural area can be described as –
|The population of municipal corporation or cantonment board
|If a place is outside the local limit of a municipal corporation or cantonment board by 2 Km
|More than or equal to 10 thousand and less than 1 Lakh.
|If a place is outside the local limit of the corporations by 6 Km
|More than or equal to 1 Lakh and less than 10 Lakh
|If a place is outside the local limit of the corporations by 8 Km
|More than or equal to 10 Lakh
The following conditions should be met to avail exemption on capital gain tax on property in India –
In case there is a delay in investment, the individual can deposit the same amount in the bank for the exemptions as a long-term capital gain. The investment needs to take place within 2 years or else it will be accounted as short-term capital gain in the year of the expiry of the same.
An individual depending on his/her use of capital gain can determine their capital gain tax on property. It will help them quantify the entire taxable amount for that year.