According to the Income Tax Act, movable property or land is regarded as a capital asset. When a taxpayer sells an immovable object or a piece of land, they must report the profit or loss as capital gain on sale of property in their ITR and pay tax as per calculation. Capital Gain on Sale of Property or land or land is calculated based on the type of capital gains on property. Both long and short term. While the STCG on the sale of real estate is taxed at slab rates, the LTCG is taxed at 20% with an indexation advantage under Section 112 of the Income Tax Act.
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Two Different Forms of Capital Gains on Property
Depending on how long an individual holds a capital asset, there are two different forms of capital gains on property.
- Long Term Capital Gain (LTCG): A gain or loss on the sale of an immovable property or piece of land that the taxpayer has owned for longer than 24 months is referred to as a long-term capital gain (LTCG) or long-term capital loss (LTCL).
- Short Term Capital Gain (STCG): A short-term capital gain (STCG) or short-term capital loss (STCL) is a gain or loss on the sale of an immovable property or land held for up to 24 months by the taxpayer.
How to Calculate Short Term Capital Gain Tax on Sale of Property in India
The slab rates apply to the short-term capital gain on sale of property. If there is a short-term capital gains on property, there is no indexation benefit. Additionally, the Section 54 to 54GB capital gain exemption is also unavailable. As a result, the cost of acquisition, the cost of improvement, and the transfer charges are used to determine the capital gains on property.
Calculation of Short-Term Capital Gain
- Payment made in exchange for the sale or transfer of property, including any partial payments.
- The price to purchase the relevant property.
- The price of any renovations, changes, or enhancements made to the specific property.
- Costs associated with the sale or transfer of the relevant property.
How to Save Short Term Capital Gain?
The taxpayer may offset any other capital asset’s short-term capital loss (STCG) against the sale of immovable property in order to avoid STCG. Additionally, as STCG on the sale of real estate is taxed at slab rates, the taxpayer can claim Chapter-VIA deductions too.
Calculation of Long Term Capital Gain Tax on Property in India
According to Section 112 of the Income Tax Act, LTCG is taxed at 20% in India on the sale of real estate with an indexation advantage. When calculating the Long Term Capital Gain Tax on Property, the taxpayer can take advantage of the indexation benefit by computing the indexed cost of the acquisition using the Cost Inflation Index, i.e CII. The expense a taxpayer incurs to add to or improve a capital asset is known as the cost of the improvement. The Indexed Cost of Improvement may also be determined by the taxpayer using the CII.
- Sale Consideration = According to Section 50C of the Income Tax Act, the selling consideration for immovable property should be the greater of the sale value of the capital asset or the value chosen by the stamp duty valuation authority.
- Transfer Expenses = expenses that were only incurred for the capital asset’s sale.
- Purchase Cost (Indexed Cost of Acquisition) = Purchase cost * (Inflation Index of year of sale / Inflation Index of year of Purchase)
- Renovation/Construction Cost (Indexed Cost of Improvement) = Cost of Reno/Const * (Inflation Index of year of Sale / Inflation Index of year of Renovation/Construction)
- Capital Gain Exemption – In accordance with Sections 54 to 54GB, a taxpayer who satisfies the necessary requirements may claim an exemption from long-term capital gains on property.
Let’s say Mr. Shubham sells a house in April 2022 for Rs. 1.5 crore. CII for Financial Year 2022-23 is 331. For Rs. 29 Lakh, the property was bought in November 2008. CII for Financial Year 2008-09 is 137. The indexed cost of that home in 2022 would be Rs. 70,06,569 (29Lakh * 331/137) resulting in a capital gain on sale of property of Rs. 79,93,431 (1.5Cr – 70.06 Lakh), assuming no renovations were made to it.
How Can We Save Long Term Capital Gain on Property?
The taxpayer may set off either a Short Term Capital Loss or a Long Term Capital Loss from any other capital asset against such LTCG in order to avoid LTCG on the sale of immovable property. Furthermore, since Chapter-VIA deductions cannot be made against LTCG on the sale of real estate because it is subject to a special 20% tax rate.
And further, to avoid paying long term capital gain tax on property, the taxpayer may also qualify for the following capital gain exemptions:
Tax exemption U/s.54
The following requirements must be met before a person can receive an exemption under this provision –
- As a result of the 2019 budget, people who reinvested their capital gains in a maximum of two residential properties are free from paying capital gains tax on real estate in 2019. If no such reinvestment occurs, then there is no exemption. Prior to Budget 2019, a person could only invest in a single residential property.
- The entire sales consideration amount is not permitted for reinvestment; only the capital gain portion.
- The total capital gain return cannot be more than Rs. 2 crore.
- The investment should be made either a year before or two years after the sale.
- This exemption is available to an individual only once.
- A person may also invest their capital gain in a construction project, but in order to qualify for an exemption, the development must be completed within three years of the selling date.
- If the new property is sold within three years of the purchase, such exemptions will be revoked.
Tax exemption U/s.54F
The following factors should be taken into account in order to obtain tax exemption on capital gain on sale of property in India –
- The sale of long-term capital assets other than a residential property must have generated the corresponding capital gain.
- After Budget 2019, the full sum received as consideration from the sale of such assets must be invested in no more than two residential dwellings.
- Any such investment must take place either before the first year following the sale or after two years.
- You can invest in a construction project as well, but it must be finished within three years of the sale date.
An individual must reinvest the entire amount received as consideration in order to be eligible for this exemption under the capital gain tax on property. If he or she is unable to do so, the amount invested is used to determine the exemption from capital gain on sale of property. In that case, the calculation shown below is performed:
Exempted amount = (Capital Gains * cost of new house)/ net consideration amount.
Tax exemption U/s.54EC
A person is eligible for exemption from capital gains tax on the property if they satisfy the following requirements –
- Any capital gain from the sale of a residential property must be invested in certain bonds offered by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI).
- The investment cannot be for more than Rs. 50 lakh.
- Five years following the selling date, a person may redeem their investment sum. Prior to the Financial Year 2018–19, when the duration was 3 years, the new time frame was implemented.
- The purchase must be made prior to filing taxes for the relevant year or within six months of the transaction.
If the person is unable to make an investment before submitting their taxes for the year, they may deposit the money in a PSU bank or any other bank on the list of banks covered by the Capital Gains Account Scheme (1988) instead. Then, a capital gains tax exemption on the sale of property would be justified. However, in order to avoid being treated as a short-term capital gain in the year the conversion deadline passes, such a deposit must be turned into an investment within 2 years of the date of sale.
Tax exemption U/s.54B
Only capital gains from the sale of land used for agriculture outside of a rural area are eligible for this exemption.
To be eligible for a capital gains tax exemption on real estate in India, the following requirements must be completed –
- Within two years after the selling date, the capital gain must be invested in new agricultural land.
- Within two years after the selling date, the capital gain must be invested in new agricultural land.
- To qualify for the exemption, the investment must be made prior to filing taxes for the same fiscal year.
If the investment is delayed, the person may deposit the same amount in a bank to qualify for the exemptions as a long term capital gain tax on property. The investment must be made within two years, failing which it will be treated as a short-term capital gain in the year it expires.
A person’s capital gain tax on property might be calculated based on how they intend to use their capital gains. They can use it to calculate their whole taxable income for that year.
Calculation of Capital Gains if Property Sold Before Possession
Frequently, the taxpayer will sell the real estate before taking control of it. Let’s see how capital gains are handled in that circumstance.
A property that is still being built has been reserved by you. In essence, you have only bought the rights to the property that is still under construction. You want to sell the rights right now, before the construction is finished. Now, the first thing that springs to mind is how can I figure out my tax due and capital gains for the same?
On Febuary 8, 2013, Shubham paid INR 32 Lakh to reserve a home in a housing plan. The plan will transfer ownership of the property on March 6, 2017. Shubham discovers a superior plan and desires to sell the rights to it. The period of time between the property’s booking date and the date of the agreement to sell the rights to the under-construction property will determine whether capital gains are taxable.
- If Shubham transfers the rights prior to February 8, 2016, then
- Then it will result in short term capital gains since the holding period is less than 36 months.
- Indexation benefit is not applicable.
- The capital gain will be taxable at normal slab rate applicable to the individual.
- Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax on property.
- Shubham transfer the rights after February 8, 2016
- Because the holding period is longer than 36 months, it will then result in long term capital gain on property.
- The builder’s charge, stamp duty, and registration costs are all subject to the indexation benefit.
- Capital gains will be subject to a 20% tax rate.
- Because they are long-term capital gains, Sections 54F and 54EC exemptions are applicable.
- The exemption under Section 54 is not available to you since it only applies to the purchase of new residential property offset by the sale of existing residential property. Here, rather than selling the actual residential property, you are selling the right to buy one. Many people mistakenly treat the sale of a property that is still under construction as if it were the sale of a residential home for the purposes of claiming the long-term capital gain exemption, and they risk receiving a scrutiny notice.
Set Off and Carry Forward Loss on Sale of Property
- A long-term capital loss is the loss on the sale of an immovable property held for longer than 24 months. The taxpayer may only set off Long Term Capital Losses (LTCL) against Long Term Capital Gains (LTCG), according to the income tax regulations regarding the set off and carry forward of losses. They can set off only against LTCG and carry forward the leftover loss for an additional 8 years.
- Short-term capital loss is the loss on the sale of an immovable property held for up to 24 months. Both short-term capital gains (STCG) and long-term capital gains (LTCG) may be offset by the taxpayer’s short-term capital losses (STCL). They can set off only against STCG and LTCG and carry the remaining loss forward for an next 8 years.