Long Term Capital Gain on Property

The proceeds that are generated through the sale of capital assets are categorised as capital gains. To understand such gains better, individuals first are required to know what comprises capital assets.

Typically, any housing property, land, buildings, patents, vehicles, leasehold rights, trademarks, investments, machinery and jewellery are counted among capital assets.

However, the following properties are not considered as capital assets–

  • Stocks or raw materials that are held for business operations.
  • Personal goods
  • Specific gold bonds issued by the Government
  • Special bearer bonds
  • Gold deposit bonds that are issued under any gold deposit scheme
  • Agricultural land situated in rural India within a stipulated distance

What is Long-Term Capital Gain on a Property?

The capital gains accrued through the sale of any real estate asset is deemed as capital gain on a property.

If such a property is held by the individuals for over 24 months, the proceeds earned through its sale would be treated as a long-term capital gain on property.

How is Long-Term Capital Gain Calculated?

To compute LTCG on a property, individuals first need to be aware of a few terms and their meanings.

Having basic knowledge on such terms would prove to help compute the long-term capital gain accurately.

Individuals who intend to sell their property should make it a point to know about these following –

  • The full value of consideration

It stands for the value that an individual would receive for selling their property. Such consideration may either be in the form of cash or kind.

If individuals are opting for an exchange of asset, they should ensure the full value of consideration of the asset offered in exchange is sold at the prevailing fair market value.

If they decide to avail the full value of consideration in installments spread across different years, the value of consideration should be the market value of the asset offered in exchange.

  • Expenses on Transfer

Any cost that is incurred by an individual either directly or indirectly during the transfer of the property in question would be regarded as an expense on transfer.

Such expense may be incurred as a brokerage expense, advertisement expense, registration fees, stamp duty, legal expense, etc.

  • Cost of Acquisition

It is the cost that individuals had to meet to acquire a property. The expenses that were incurred by individuals during the completion of the title are considered to be a part of this cost.

  • Cost of improvement

The cost that was borne by individuals for making any alterations or additions to the property in question after acquiring it would be treated as the cost of the improvement.

  • Cost of Inflation Index

The benefits availed through indexation tends to help individuals not just to lower the tax liability on LTCG on a property but also helps to make provisions against inflation in advance.

It also plays a crucial role when it comes to computing long-term capital gains.

With the help of the Cost of Inflation Index (CII), individuals can determine the Indexed Cost of Improvement and Indexed Cost of Acquisition.

Here is a basic formula of the same –

Indexed Cost= (Cost of acquisition x CII set for the year of sale) / CII set for the year of purchase

Individuals can use the table below to calculate the indexed cost of their respective property –

Fiscal Year Cost Inflation Index Number
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2012-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280

How is Long-Term Capital Gain Tax Calculated?

Only after individuals are clear about these concepts and their associated calculations, they can proceed to calculate the Long-term capital gain in the property. 

A rate of 20% is levied as a tax on capital gains generated through the sale of a property.

The table below would offer an idea of how tax is calculated on long-term capital gains on a property in 2022.

Full Value of Consideration XX
(LESS) Expenses incurred during sale or transfer XX
(LESS) Indexed Cost of Acquisition XX
(LESS) Indexed Cost of Improvement XX
Gross LTCG on property XX
(LESS) Exemption under Section 54/54B/54D/54EC/54ED/54ED/54F/54G XX
Net long-term capital gain on a property XXXX

If individuals incur a capital loss in the process, they may set it off against other capital gains they have accrued in that financial year.

If they cannot set off against other capital gains, they have an option to carry it forward. Individuals can carry forward such capital loss for the following eight years.

However, they can avail such an option if their return was filed in due advance of the set date.

Exemptions on Long-Term Capital Gain on a Property In 2022

Taxes tend to reduce the bulk of gains earned by an individual. This is why the Income Tax Department of India has made several tax provisions which help individuals lower their tax liability and further help to protect their gain from erosion.

Taxpaying individuals have to be aware of such provisions that allow them to claim exemptions on their long-term capital gains in 2022.

Individuals avail the benefit of both indexation and exemption to improve their earnings.

Find out a few of such exemptions available on the sale of property from below –

  • Exemption available under Section 54

If individuals decide to sell a housing property and reinvest their proceeds into another housing property, they would be deemed eligible to claim an exemption under Section 54.

The amount individuals would be able to avail as an exemption would be equal to –

Either capital gains generated through the transfer of a housing property or the amount invested in purchasing or constructing a new housing property. Which of the two is lower and then the remainder would be taxed accordingly. However, there are certain conditions which they must fulfil to avail such benefit.

Conditions like –

  • An asset in question must be a long-term capital asset.
  • Sellers should either be an individual or a Hindu Undivided Families.
  • Income generated from such a property should be charged under ‘Income from House Property’.
  • Gains should be reinvested to purchase a housing property either a year before the sale or two years after. Instead of purchasing a property, they can invest the proceeds on constructing a new housing property as well, but it should be constructed within three years.
  • New property should be purchased or constructed in India.

To claim an exemption under this Section, individuals must fulfil all conditions that come along with it.

If an individual chooses to sell the new property within three years, the exemption they had availed previously will attract indirect taxation on the sale of the same.

Individuals often mistake Section 54 with that of 54F.

The table below will offer a better idea about the difference between the two –

Section 54 Section 54F
Individuals need to reinvest their entire LTCG on a property to claim full exemption. Individuals need to reinvest their entire sale receipts to claim full exemption.
The balance LTCG on property attracts an LTCG tax. The balance sale receipt is entitled to an exemption.

(Exemption = Cost of new housing property x capital gains /sale receipts)

Exemption under this Section will be reversed if the new property is sold within three years. The LTCG on property would be then treated as short-term capital gains. Exemption under this Section will be reversed if the new property is sold within three years. If an individual decides to purchase another housing property within three years of sale of the property in question, the exemption would be reversed. The capital gains generated would be treated as LTCG.

Another condition that individuals availing a claim under Section 54F should fulfil is that they should not possess more than one housing property at the time of sale.

How to Save Tax Liabilities Long-Term Capital Gain on a Property?

As per Budget 2022, a proposition has been made where individuals would be allowed to reinvest long-term gain generated through a property into two residential properties.

This move would help investors to reduce their LTCG tax liability.

However, individuals would also have to ensure that the sum of sale proceeds should not be more than Rs. 2 Crore. Additionally, such benefit can only be availed only once by an individual.

Individuals can also invest in specific bonds that are mentioned under Section 54EC to lower their tax burden on LTCG on a property further.

TDS Provisions on Property

Besides taxation on the proceeds earned through the sale of a property, individuals should also able be familiar with Tax deduction at Source (TDS) concerning the property.

If individuals decide to sell a property that is worth more than Rs. 50 Lakh, It is regarded as the duty of buyers to deduct a per cent of the property’s value as TDS.

The property seller should also make it a point to find out if buyers have deposited such TDS with the responsible tax authority.

Such a habit would help property sellers to claim exemption at a time when they decide to reinvest long-term capital gain on property.

Individuals should be aware of the latest tax provisions on long-term capital gains on a property in 2022 to make the most of their capital gains.

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