Capital gain can be defined as any profit earned by an individual after selling a capital asset of their holding. It is a broad umbrella that includes both movable and immovable assets, including residential properties and land.
Any profit earned from selling such capital assets is categorized as an individual’s income and hence is liable to taxation according to Indian Income Tax Act, 1961. A seller will have to pay short term capital gain tax on the sale of the property in the same year along with their income corpus.
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Tax Implications on Short-Term Capital Gain on Property
Tax levied on short-term capital gain is calculated based on an individual’s Income Tax slab. For example, if a seller is liable to pay 20% Income Tax on his or her income, and earns a capital gain of Rs. 5,00,000 from selling a property, than he or she will have to pay Rs. 1,00,000 as short term capital gain tax on property while filing his or her Income Tax returns.
However, there are certain specifics in that regulation that categories a capital asset as stock-in-trade, or a property. Let’s take a look.
Suppose Mr. Singh purchases a house in January 2019 for Rs. 9,00,000 and sells the same property in February 2020 for Rs. 10,00,000. The profit of Rs. 1,00,000 will attract tax on short term capital gain on property under the head “Capital Gain”.
However, if Mr. Singh purchases the property for resale purposes (as a registered property dealer), the house will be considered as a stock-in-trade for his business. Considering he purchased the unit for Rs. 9,00,000 and sold it for Rs. 10,00,000 within the same time frame, the profit earned will be categorised under business income instead of capital gains and will not attract taxes on short term capital gain tax rate on property.
Type of Property Considered as Short-Term Capital Asset
Any immovable property with a holding period less than 24 months is considered as a short-term capital asset. This includes –
- Buildings, lands, residential units, houses.
- Agricultural land barring some exceptions.
Investing in property can be beneficial in the long run as property price increase significantly with time. Moreover, it is market independent, which ensures substantial capital gain for almost every investment scenario.
Calculation of Short Term Capital Asset
Calculating short term capital asset necessitates including certain factors like the sale value of a property, expense incurred while selling that asset (commission, brokerage, etc.), net sale consideration. Here is an example to better illustrate the process.
Mr. Singh, a salaried employee, purchased a house worth Rs. 10,00,000 in October 2018. He sold that property on July 2019 for Rs. 10,80,000, and paid brokerage of Rs. 12,000 while selling that property.
With a holding period of only 9 months, the profits made from the sale will be considered as short-term capital gain and will attract short term capital gain tax on property.
For this example, the total taxable amount will be –
|Sale value of the property||Rs. 10,80,000|
|Net sale consideration = Sale value – expense incurred in course of transfer of the property||Rs. 10,80,000 – Rs. 12,000 = Rs. 10,68,000|
|Short term capital gain = Net sale consideration – (Cost of asset acquisition + cost of any modification or repairs)||Rs. 10,68,000 – Rs. 10,00,000 = Rs. 68,000|
Adjustment Against the Basic Exemption Limit for Short Term Capital Growth
There are certain exemption limits in place which allows an investor to enjoy tax benefits against selling of their short-term capital assets. These are considered as basic exemption limits, indication certain levels of income up to which an individual will not have to pay any taxes. The said limit for financial year 2018-2019 is the following –
- Investors below 60 years of age will enjoy a maximum exemption limit of Rs. 2,50,000.
- Individuals between 60 to 80 years of age will be exempted to a maximum limit of Rs. 3,00,000.
- Investors of 80 years of age (or above) will be allowed a maximum exemption of Rs. 5,00,000.
- Hindu Undivided Families will enjoy an exemption limit of Rs. 2,50,000.
The above mentioned limit will be applicable only for Indian residents paying tax on short term capital gain on property. Non-residing Indians will be allowed a maximum exemption limit of Rs. 2,50,000, regardless of the age of the seller.
The above mentioned rules apply for short term capital gain tax on property. Investors should carefully consider the regulations applied on these investments before investing.