According to RBI’s report titled, “The Indian Household Finance Landscape” in September 2017, 76.9% of household wealth in India is invested in real estate. 59% of the poorest 20% in the country own a dwelling unit of some kind or land. Thus, while selling your property, you will receive a sizeable amount which will in turn be subject to taxes. Understanding the nuances of capital gains will ensure that you optimise on taxes in the event of the sale of the property.
Time Criteria For Capital Gains On Property
There are 2 types of capital gains taxation:
Short-Term Capital Gain On Property Taxation
If the property is sold within a period of 36 months, then you will be liable for short-term capital gains. The gain which is the difference between the sale and buy value will be added back to the income and the same will be taxed at marginal tax rates.
The same can be as high as 30% + cess + surcharge for someone earning above Rs. 10 Lakh a year.
Long-Term Capital Gain On Property Taxation
If the property is sold after 36 months, the profit is treated as long-term capital gains and can be taxed at 20% after indexation.
Indexation adjusts for inflation during the holding period, the purchase price is adjusted to reduce the tax burden on the seller.
The seller, in the event of long-term capital gains, can claim expenses incurred on repairs and renovations can be added to the purchase cost while computing long-term capital gains. The interest paid under the pre-construction period can be added back to the cost. This benefit remains unavailable for short-term capital gains.
LTCG and STCG Rates in 2023-24 and 2024-25 – Comparison
Product
Before
After
Period of holding
Short Term
Long Term
Period of holding
Short Term
Long Term
Equity-oriented MF units
More than 12 months
15.00%
10.00%
More than 12 months
20.00%
12.50%
Specified Mutual funds which have more than 65% in debt
More than 36 months
Slab rate
Slab rate
More than 24 months
Slab rate
Slab rate
Equity FoFs
More than 36 months
Slab rate
Slab rate
More than 24 months
Slab rate
12.5%
Overseas FoF
More than 36 months
Slab rate
Slab rate
More than 24 months
Slab rate
12.5%
Gold Mutual Funds
More than 36 months
Slab rate
Slab rate
More than 24 months
Slab rate
12.5%
How to Calculate Capital Gain on Property?
To calculate capital gain on property, you need to determine whether it’s a short-term or long-term gain based on the duration of ownership.
If you sell the property within 24 months of ownership, short-term capital gains will apply. For example, suppose you purchased a property for Rs. 1.6 lakh. After 1 year, you sell it for Rs. 2 lakhs and pay Rs. 3,000 in transfer expenses. This brings your net sales amount to Rs. 1.97 lakh. In this situation, your short-term gain will be Rs. 37,000 (Rs. 1.97 lakh – Rs. 1.60 lakh).
On the other hand, if you’ve owned the property for more than 24 months, long-term capital gain will apply. For example, suppose you purchased a property that is valued at Rs. 4 lakh after indexation. If you sell it for Rs. 7 lakh after 2 years and pay Rs. 8,000 in transfer expenses, your net sale amount will be Rs. 6.92 lakh. In this situation, your long-term gain will be Rs. 2.92 lakh (Rs. 6.92 lakh – Rs. 4 lakh).
Tax Deduction for Home Loan:
The tax deductions under section 80C allow principal repayment and stamp duty, the section is subject to a maximum of Rs. 1.5 Lakh (including other investments) and section 24B allows interest payment on the home loans. However, this deduction under section 80 C would be reversed if the house is being sold within five years from the end of the financial year in which possession of the house was obtained and the same will be added back to your income in the Financial Year in which it is sold. Nonetheless, there is no similar provision for reversing tax benefits claimed with respect to interest on home loans.
CGT On Sale of Property: Exemptions
1. Tax Exemption under Section 54
To avail of this exemption, you must meet the following criteria:
– Long-Term Capital Asset: The property sold must be a long-term capital asset.
– Residential Property: The asset sold must be a residential house, earning income as “Income from House Property.”
– Purchase/Construction Timeline: You must buy a new house within 1 year before or 2 years after selling the original house. On the other hand, if you are constructing a house, you must complete it within 3 years from the sale.
– Location: The new house must be in India.
– Exemption Limit: Exemption capped at Rs. 10 crore from April 1, 2023.
– Conditions: All conditions must be met to qualify.
– Special Exemption (From FY 2019-20): You can buy up to two houses in India if the capital gain doesn’t exceed Rs. 2 crore (available once in a lifetime).
2. Tax Exemption under Section 54F
Under this section, you must reinvest the entire capital gain amount to qualify for an exemption. If the invested amount is less than the capital gain, the exemption will be proportional to the amount invested.
3. Tax Exemption under Section 54EC
To avail of a tax exemption under section 54 EC, you must invest in specified bonds within 6 months of the sale. If you’re unable to invest immediately, you can deposit the amount in a bank under the scheme and invest within 2 years to avoid short-term capital gain treatment.
4. Tax Exemption under Section 54B
This capital gain applies to the sale of agricultural land outside rural areas. You must reinvest the gains within 2 years to avoid treating it as a short-term capital gain.
How to avoid capital gain tax on the sale of properties?
You can avoid capital gains tax by reinvesting the profits in another residential property.
How much tax on capital gains property sale?
Capital gains tax depends on whether it’s short-term (up to 2 years) or long-term (above 2 years). The rate is 20% with additional cess and surcharge for the long term and 30% for the short term.
What is a long-term capital gain tax on property for senior citizens?
Long-term capital gains tax for senior citizens is the same as for others, 20% with indexation. There is no special exemption for senior citizens on capital gains tax.
Are NRIs liable to pay taxes on gains made on the sale of property in India?
Yes, NRIs are liable for capital gains tax on property sales in India and are subject to the same rules as residents.
Do I immediately need to pay my capital gains tax?
No, you don’t need to pay capital gains tax immediately. However, you must pay advance tax by the due date while filing your ITR to avoid interest under sections 234B and 234C.
09 December 2024
5 mins read
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