Capital gain is a process where an individual earns a profit on his or her investment by trading their capital assets. These capital assets can range from investments like shares or precious metals to possessions like real estate.
Capital gains by selling a property usually refer to the revenues earned due to the sale or transfer of homes, land plots, building, etc. Profits earned from such transactions are usually considered as income of an individual and is taxed under the Income Tax Act of India under Capital Gains.
Short Term Capital Gain on Property
Capital gain on a property can be classified into two types, based on the total holding period of that investment. If it is owned longer than 24 months, it is considered as a long-term capital gain, whereas any transfer before 24 months is categorised as short-term capital gain on sale of property.
It is calculated with the following formula –
Short Term Capital Gain = Sale value of the property – (cost of acquisition + expenses incurred in the course of sale + cost of asset improvement).
- Sale Value
Sale value of a property is the amount an investor receives when he or she sells a particular asset.
- Cost of acquisition
Cost of acquisition is the original price of a property that the seller pays when purchasing the assets for the first time. The cost of acquisition usually comprises all the expenses, including the brokerage, legal formalities, and other cost associated with purchasing a residential property.
- Cost of asset improvement
If an owner performs any type of modification or repair to a particular property during his or her ownership, the expenses incurred will fall under the cost of asset improvement. It usually includes repair and construction costs, cost of expansion of a property, etc.
- Expenses incurred in the course of sale
These expenses include cost sustained while selling a particular real estate, including legal fees and other cost experienced while trading that particular real estate.
Short term capital gain is taxable alongside one’s existing income. Here is how the total taxable amount is calculated.
Tax levied on the selling of immovable assets within a time frame of fewer than two years will be calculated based on the investor’s Income Tax slab rate. For example, if an individual is in 30% tax bracket and earns a capital gain of Rs. 6,00,000 from selling a property, then he or she will be liable to pay Rs. 1,80,000 as tax while filing their Income Tax returns.
Also, there are certain regulations that divide the capital gain earned from selling property in different categories. For example –
If Mr. Roy purchases a residential property in April 2019 for Rs. 84,00,000, and sells the same property in July 2019 for Rs. 90,00,000, than the Rs. 6,00,000 profit will be considered as STCG on sale of a property. As the house is considered as a capital asset, it will be liable to tax under the head “Capital Gain”.
However, there are certain exemptions in this rule. For example –
Say Mr. Roy is a property dealer and purchases a residential property for resale purposes. Presume he purchases a property in April 2019 for Rs. 84,00,000 and sells it in April 2020 for Rs. 90,00,000. The profit made from that transaction, Rs. 6,00,000, will not be taxed as STCG on property as it will be considered as a business income and not as capital gains. The residential property will be considered as stock-in-trade for his business.
Adjustment of Short-Term Capital Gain Against Exemption Limit
The Government of India allows a certain exemption limit depending on the age and level of income of an investor. Here is the basic exemption limit applicable as per the Financial year 2018-2019.
- Indian residents below 60 years of age will be exempted from paying Income Tax on short term capital gain on sale of property if the profit stays within Rs. 2,50,000.
- Indian residents between the age of 60 to 80 years will enjoy a higher exemption limit of Rs. 3,00,000 on the sale of a property.
- Indian residents older than 80 years will be eligible for up to Rs. 5,00,000 on STCG on sale of property.
- Hindu Undivided Family will be exempted for up to Rs. 2,50,000 on capital gain from selling a property.
- Non-residential Indians will be limited to an exemption limit of Rs. 2,50,000, irrespective of the age of the investor.
Short-term capital gain on property can be beneficial as a quick way to fulfil certain financial obligations. The above mentioned regulations and taxes will be levied on short term capital gain on sale of property, and investors can take their decisions accordingly to reap the maximum benefits.