If you are looking at house or property as an investment, then you should make sure that you have atleast the basic knowledge of taxation.

When you sell your house or property, chances are high that you would be doing it only if you are making some profits. Isn’t it? Ofcourse there can be financial crunch-like situations but in general, people would want to sell only when they are profiting from it.

Profit on sale of capital items is termed as capital gains. Now this capital gains is taxed differently depending on the holding period of the property:

  • Gains made on sale of property that was in possession for less than 2 years are termed as short-term capital gain (STCG).
  • Gains made on sale of property that was in possession for more than 2 years are termed as long-term capital gain (LTCG).

Earlier, the time period for deciding long or short term was set at 3 years. It has been announced in the Budget of 2017-18 to change it to 2 years.

Both STCG and LTCG are taxed differently.

Short-term capital gains are added to seller’s total income from all sources and taxed according to his/her tax slab. But in case of long-term capital gains, the seller has to pay 20% tax on gains after indexation.

Lets take an example to understand this.

Suppose you purchased a property for Rs 25 lacs and now it is being sold for Rs 50 lac.

If the period of holding the property is less than 2 years and you are in 30% tax bracket, your tax on sale of this property will be 30% of (Rs 50 lac – Rs 25 lac), i.e. Rs 7.5 lac.

Now suppose the period of holding was 5 years. The property was bought in 2011-12 (index – 785) and is sold in 2016-17 (index – 1125).

So now, the indexed cost of property is (1125/785) x Rs 25 lac = Rs 36 lac.

The effective capital gains is Rs 50 lac – Rs 36 lac = Rs 14 lac. This is taxed at 20%, i.e. 20% of Rs 14 lac that is Rs 2.8 lac.

So there is a definite benefit of waiting more than 2 years to sell your property and reduce your tax outgo.