Capital Gains Tax on Property – Sale of Property

Capital gains can be defined as profits or gains generated from the sale or transfer of any capital assets. These capital assets are defined as any property – movable or immovable, tangible or intangible and those are legally owned by an individual.

Residential properties, equity shares, equity-oriented funds, automobiles, land plots, building, gold, etc are examples of capital assets. Any profit generated out of the sale of these assets are termed as capital gains and are taxed under the income head ‘Capital Gains.’

But if your nature of business itself is selling and purchasing of capital assets, then the profits from the same will be considered as ‘Income from business or profession.’

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Long-Term Capital Gain and Short-Term Capital Gain

Based on their holding period by the seller, Capital assets can be classified into two types: long-term capital assets and short-term capital assets.

Capital gains from the respective capital assets fall under either– long-term capital gain or short-term capital gain.

Any asset which has been held by an individual for 36 months or less before sale/transfer is considered as a short-term capital asset.  The tenure to qualify as short-term capital asset is 24 months or less in case of immovable properties like buildings, provided the selling process takes place after 31st March 2017.

Any asset which is held for more than 36 months or 24 months, depending on the object, is considered a long-term capital asset. Sale of a housing property after holding it for 24 months or more, profits arising therefrom will be considered as long-term capital gains.

Capital gain tax on property is taxed differently depending upon the type of it.

The tax rate on long-term and short-term capital gains are shown in the table below –

ConditionsType of gainTax rate
If a property is sold within 24 months of acquiring it, after 31st March 2017.Short-term capital gainThe gain will be added to the existing income of such an individual and taxed as per the applicable tax slab.
If a property is sold after 24 months, post 31st March 2017Long-term capital gain20%

How to calculate Short-Term Capital Gain?

Take into account the following:

  1. Consideration received, or full value consideration received in exchange for the sale/transfer of property.
  2. The cost of acquisition of  the respective property.
  3. The cost of any improvements or alterations or renovations made to the respective property.
  4. Expenses related to sale or transfer of the respective property.

How to calculate Long-Term Capital Gain?

The following are considered to calculate long-term capital gain –

  1. Full consideration received upon the sale or transfer of property.
  2. Indexed cost of acquiring the respective property.
  3. Indexed cost of improvements or renovations or alterations made to the respective property.
  4. Expenses in the course of executing the sale or transfer.
  5. Tax exemptions.

The cost of acquisition and cost of alteration is indexed to adjust against inflation, in case of long term capital gains. Cost indexation is done for the benefit of the assesses for whom calculation is done for capital gain tax on sale of property, because otherwise the profit would be inflated incurring more tax. It is also called Cost Inflation index (CII).

Let’s take an example to understand the above. Mrs. Y sells her residential property for Rs. 50 lakhs during February 2018. The house was acquired in June 2004 for Rs. 10 lakh. The indexed cost of that house in 2018 would be Rs. 24,07,080 ( 10lakhs*272/113). Here we have assumed that there was no cost incurred by way of repairs/renovation. The amount of capital gains will be Rs.25,92,920.

An individual can avail any of the exemptions depending on the kind of reinvestment made after receiving the amount of consideration as capital gains, under section 54, 54F, 54EC and 54B.

Tax exemption under section 54:  After Budget 2019, exemption on capital gain tax on property is allowed if such an amount is reinvested in a maximum of two housing properties. An individual could only invest in a maximum of one housing property before that.

  • The amount of capital gain only is allowed for reinvestment and not the entire sales consideration amount.
  • The Capital gain should not be more than Rs. 2 Crore.
  • The investment should be made one year before the sale has taken place or two years after it.
  • The exemption is available only once to an individual.
  • The amount of capital gain can be invested in a construction project but such a construction should be over within 3 years from the date of sale.
  • Exemption will be revoked if the new property is sold within 3 years of purchasing it.

Tax exemption under Section 54F: 

  • Applicable to the capital gain from the sale of long-term capital assets other than a housing property.
  • The entire consideration received must be reinvested in a maximum of two housing properties post Budget 2019.
  • Investment should take place  before 1 year of sale or after 2 years.
  • Investment can be made in a construction project but that needs to be completed within 3 years from the date of sale. If an individual fails to reinvest the entire amount received as consideration, then exemption is calculated on the basis of the amount invested. In that case

Exempted amount = (Capital Gains * cost of new house)/ net consideration amount

Tax exemption under Section 54EC:

  • Capital gain arising from the sale of a housing property must be reinvested in specific bonds provided by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
  • Investment must be up to a maximum of Rs. 50 Lakh.
  • The investment amount can be redeemed after 5 years from the date of sale. (The revised time introduced in the FY 2018-19). It used to be 3 years before that.
  • The investment must be made before filing tax for that particular year or within six months from the date of sale.

An individual can deposit the amount in a PSU bank or any other bank listed under the Capital Gains Account Scheme (1988)in case of failure to invest before filing tax for that year. This 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.

Tax exemption under Section 54B: This exemption is applicable to capital gains from a sale of land for an agricultural purpose outside of a rural area. Rural area for this purposes can be defined as –

LocationThe population of municipal corporation or cantonment board
If a place is outside the local limit of a municipal corporation or cantonment board by 2 KmMore 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 KmMore than or equal to 10 Lakh

Further the following conditions should be met–

  1. The capital gain needs to be reinvested in a new agricultural land within 2 years from the date of sale.
  2. The exemption will be revoked if the newly purchased land is sold within 3 years of purchase.
  3. The investment should take place before filing the return of tax in the same financial year.

In case of delay in making the investment, the amount can be deposited in the bank. The investment must be made within 2 years otherwise it will be taken as short-term capital gain in the year of expiry of the same.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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