Most people invest in property to see greater returns in the future, but are not aware that ‘timing’ plays a major role in fetching the best returns. While one can sell the property immediately once they see an appreciable market value, they must consider the tax implications on the sale of property.
Types of Capital Gains on selling of property
As per the Income Tax rules the capital gain tax structure is divided into 2 categories- Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).
Short Term Capital Gains (STCG)
If an investor buys and sells property within 36 months, his profit comes under STCG. This gain is included in his taxable income for that year and is taxed as per his tax slab.
Long Term Capital Gains (LTCG)
If an investor buys property and sells it after 36 months, his profit comes under LTCG. LTCG is taxed at a flat rate of 20%. If the person’s total income apart from the LTCG is less than the zero slab, then only the LTCG over the zero slab attracts tax at 20%.
How to calculate Capital Gains
The short term capital gain is calculated by deducting from the sale price the cost of acquisition, the money spent on improving the property and the transfer cost. For long term capital gain, tax calculation involves what is known as indexation. The acquisition cost or cost of acquiring the asset is recalculated based on indexation. Indexation is a concept, which factors inflation in its calculation by using a factor called cost inflation index (CII). The cost inflation index number is published every year by Reserve Bank of India (RBI).
STCG = Sale price – (Cost of acquisition + Cost of improvements + Cost of transfer)
LTCG = Sale Price – (Indexed cost of acquisition + Indexed cost of improvements + Cost of transfer)
Wherein
| Sale price | Price the house is sold at |
| Cost of acquisition | Sum total of amount spent for acquiring the asset |
| Cost of improvements | All expenditure of a capital nature incurred in making additions or alterations to the capital asset |
| Cost of Transfer | Other costs incurred while selling the property. This may include brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance and other documents, cost of inserting advertisements in newspapers for sale of the asset and commission paid to auctioneer, etc. |
| Indexed cost of acquisition | Cost of acquisition x (CII of year of transfer / CII of year of acquisition) |
| Indexed cost of improvements | Cost of acquisition x (CII of year of transfer / CII of year of improvements) |
How does one avail tax benefits on the re-investment of these gains?
A property owner cannot avoid tax on short term capital gains but can claim exemption from the long term capital gains on the reinvestment of the capital gains/sale proceeds only in particular investment avenues, subject to certain conditions.
Buying a property
A property seller can claim long term capital gain exemption by using the entire profit to either buy another property within a period of 2 years or can even construct a house in 3 years. However, he can only invest in a residential property and not a commercial property or a vacant land. He can also avail tax exemption if he has bought a second property one year before the transfer of the property.
Investing in the Capital Gains Account Scheme (CGAS)
In case the property owner fails to make an investment at the right time to avail the tax exemption benefits for capital gains, he/she can deposit the amount of capital gain/the net consideration in a separate account with a nationalized bank as per the Capital Gains Account Scheme (CGAS). However, the deposited money can be used only to buy or construct a residential house within the prescribed time frame. Failure to do so will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first property. One can either create a Type A (savings deposit account) or a Type B (term deposit account) as they both have the same interest rates as that of regular savings and term bank deposits.
Investing in Bonds
A person selling property falling under the LTCG can claim tax exemption under Section 54EC of the Income Tax Act by investing in notified bonds within six months of transfer of the property. These bonds are issued by the National Highway Authority of India and the Rural Electrification Corporation. However, if you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
Hi,\r\n\r\nIf the property having ‘A’ Khata is sold and another property purchased having ‘B’ Khata, is the benefit on capital gains still applicable.\r\n\r\nPlease clarify.\r\n\r\nThanks in advance.
Request you to throw some light on the following.\r\nWhat are the rules if the property is sold after 35 years of initial purchase?
Hi Venkat\n\nIf the property is sold after 35 years, then it will attract long term capital gains tax on account of appreciation. Capital gain is the difference between the cost of purchase and your price of sale. However, it is not a simple difference because the cost of purchase is indexed to inflation over the years and then the difference is computed. Further the cost of repairs, modifications, improvements which are supported by bills including betterment charges if paid to government can also be added to the cost.\n\nIf you invest the capital gains based on this computation into another property or invest into long term capital gains bond then you can completely avoid any tax. If the computed value is a loss, you can take it forward in your IT returns as capital loss and offset it against capital gain of the same kind in future. If the computed value is a gain and you are not reinvesting into another property then you will have to pay tax @ 20% on the gain.
What if my Cost of purchase and selling price is the same?
And what if it is an agricultural land?\r\nBasically if an agricultural land is bought and sold within 36 months what will be the tax to be paid in the following conditions\r\na) Sold at the same price\r\nb) Sold at a lesser price\r\nc) Sold at a profit
Hi Vishal,\n\nFor agricultural land, there is no capital gain tax involved. However, we suggest you to consult a reputed Chartered Accountant on this.
When we say three years from purchase what does this mean. Three years from registration or 3 years from possession?\r\nAlso is there a clause which says that if property is sold before 5 years, then all the tax benefit which one gets for principal and interest of home loan will have to be paid back?
Hi Dhruv,\n\nThere is always a debate about the technicality of the date of purchase. When you are buying an under-construction flat and you enter into a sale agreement (which technically accrues the rights of the flat to you) or get a allotment letter (in the case of BDA / State Housing Board), then that can be considered as the date of purchase though you are handed over possession much later. Usually possession comes after registration, though there are instances where the possession is given before registration for technical reasons where you are unable to complete a registration immediately.\n\nIf you are buying a completed flat or house that is already built then the date of registration which transfers the title to you should be taken as the date of purchase.\n\nYes, if property is sold before 5 years then the tax deductions you may have availed previously under sec 80C will have to be repaid.
Q regarding Sale of Property\r\n\r\nMy grandfather purchased the flat in 1980 at pune area 800 Sq Ft, \r\nflat was transfereed in my name by will in 2002, \r\nNo in 2015 i am planning to sell the flat at 4900 pq ft \r\n\r\nKindly suggest how to calculate my tax liability since i dont have purchase cost. \r\n\r\nFURTHER is there any rebate available on flat purchased before 1985? and can that be applicable in my case?
Hi Gaurang\n\nThe applicability of capital gains tax to this transaction is what needs to be looked into. The gain is calculated as the difference between the acquisition cost and the sale value. Since you got the flat and have retained it for more than 3 years, hence it will be treated as an asset held long term (long term capital gains) and indexation is allowed for computation of tax. Indexation is the concept of applying an inflation factor as published by the RBI to arrive at an indexed cost of acquisition and then subtracting it from your sale value, in very simple terms.\n\nBut you acquired this property through a will and did not pay any sum, so how do you arrive at an acquisition cost? So in this situation the cost of acquisition is deemed to be the cost at which it was acquired by the previous owner (the grantor of the will) in the year it was bought and then indexation is to be applied.\n\nThere are other costs like transfer expenses (will transfer), cost of improvement (if you have done any improvements after you got it) that can be deducted before capital gains is computed.\n\nIt is pretty straight forward for chartered accountants to compute capital gains. Please approach a good CA when you are done with the transaction and have it handled. Additionally, if you reinvest the entire proceeds into another property or construction of a property in India within a certain time period, then capital gains tax is exempt completely.