Selling property can be a significant financial decision, and understanding the tax implications is crucial for maximising your returns. In India, income from property sales is taxed under the head "Capital Gains." The tax you pay on the sale depends on whether the property qualifies as a short-term or long-term asset, as well as various exemptions available. To navigate this process smoothly, it is essential to understand how to calculate capital gain tax on sale of property. Read on to explore key aspects such as capital gain tax on property, applicable rates, exemptions, and tax-saving strategies, ensuring you are well-informed before selling your property.
What is capital gain tax on sale of property?
Income tax on property sale in India is governed by capital gains tax. The profit earned is treated as income and taxed in the year the property is transferred. The tax depends on whether it is a short-term or long-term gain.
- Short-Term Capital Gains (STCG): If the property is sold within 24 months of purchase, the profit is classified as STCG. It is added to your total income and taxed as per the applicable income tax slab, which can go up to 30%.
- Long-Term Capital Gains (LTCG): If the property is sold after 24 months, the profit is considered LTCG. It is taxed at 20% with the benefit of indexation, which adjusts the purchase price for inflation and lowers your taxable gain.
- Exemptions: Sections 54, 54EC, and 54F of the Income Tax Act provide relief if you reinvest the gains in specified assets, such as residential property or certain bonds. These provisions help reduce your overall tax liability.
Proper planning before selling can minimise tax burdens and ensure you maximise returns on your property sale.
What constitutes capital gains in property transactions?
Capital gains refer to the profit made from the sale of an asset, in this case, a property. It is the difference between the sale price of the property and the original purchase price, adjusted for any improvement costs. This gain is taxable under the Income Tax Act of India.
In property transactions, capital gains can be classified as either short-term or long-term depending on the holding period of the property. If a property is sold before completing a certain period of ownership, the gain is considered short-term. If the property is held for the specified duration or longer, the gain is considered long-term. Both types of gains are subject to different tax rates and methods of calculation.
Differentiating short-term and long-term capital gains
| Criteria | Short-term capital gains | Long-term capital gains |
| Holding period | Less than 2 years for property. | More than 2 years for property. |
| Tax rate | 30% (plus applicable cess) | 20% with indexation (plus cess) |
| Indexation benefit | Not available | Available (adjusts cost for inflation) |
| Exemption under Section 54 | Not applicable | Applicable (on reinvestment in property) |
Short-term capital gains (STCG) apply when the property is sold within two years of purchase, and they are taxed at a higher rate of 30% (plus cess). On the other hand, long-term capital gains (LTCG) arise if the property is sold after two years, and the tax rate is lower at 20%, with the added benefit of indexation, which adjusts the cost of acquisition for inflation.
Applicable tax rates for capital gains on property sale
The tax rate applicable to capital gains from property sales depends on the type of capital gain, as discussed earlier.
Short-Term Capital Gains (STCG):
If the property is sold within 2 years of purchase, the profit is subject to STCG tax, which is taxed at 30% of the gain.
In addition to the 30% tax, a 4% cess is applied to the total tax liability, making the effective rate 30.9%.
Long-Term Capital Gains (LTCG):
For properties held for over 2 years, LTCG tax applies at a rate of 20%, with the benefit of indexation.
The 4% cess is also applicable, bringing the total effective tax rate to 20.8%.
It is important to note that the applicable tax rates are subject to change, and taxpayers should stay updated on any amendments to the Income Tax Act.
Capital gains tax rates before 23/07/2024
Tax Type |
Condition |
Applicable Tax |
Long-Term Capital Gains Tax (LTCG) |
Sale of:
|
10% on gains above Rs. 1 lakh |
Long-Term Capital Gains Tax (LTCG) |
Others |
20% |
Short-Term Capital Gains Tax (STCG) |
When STT is not applicable |
Normal slab rates |
Short-Term Capital Gains Tax (STCG) |
When STT is applicable |
15% |
Capital gains tax rates from 23/07/2024
Tax Type |
Condition |
Applicable Tax |
Long-Term Capital Gains Tax (LTCG) |
Sale of:
|
12.5% on gains above Rs. 1.25 lakh |
Long-Term Capital Gains Tax (LTCG) |
Land or building or both For Individual and HUF taxpayers:
For Other persons:
|
As mentioned |
Long-Term Capital Gains Tax (LTCG) |
Others |
12.5% |
Short-Term Capital Gains Tax (STCG) |
When STT is not applicable |
Normal slab rates |
Short-Term Capital Gains Tax (STCG) |
When STT is applicable |
20% |
How to calculate capital gains tax on property sale?
Understanding how to calculate capital gain on property is essential for determining the tax liability. The process involves the following steps:
Determine the sale price: The sale price is the amount for which the property is sold. Any expenses incurred during the sale, such as brokerage fees, can be deducted from this amount.
Calculate the cost of acquisition: The cost of acquisition includes the original purchase price of the property. If the property was purchased many years ago, adjustments like inflation can be made using the indexation method for long-term property sales.
Subtract cost of improvement: Any money spent on improving the property (such as renovation or construction) can be added to the cost of acquisition.
Calculate the capital gain: The formula for calculating capital gains is:
CapitalGain=SalePrice−(CostofAcquisition+CostofImprovement)CapitalGain=SalePrice−(CostofAcquisition+CostofImprovement)
Apply tax rates: Once the capital gain is calculated, apply the relevant tax rate (30% for short-term and 20% with indexation for long-term).
By following these steps, you can accurately determine how much tax is owed on the property sale.
Example
Particular |
Amount |
Sale Consideration |
Rs. 60,00,000 |
Less: Indexed Cost of Acquisition ( Rs 20 Lakhs * 363/264) |
Rs. 27,50,000 |
Less: Indexed Cost of Improvement ( Rs. 2 lakhs * 363/272) |
Rs. 2,66,911 |
Long-term capital gain |
Rs. 29,83,089 |
Long-term capital gain tax @ 20% |
Rs. 5,96,618 |
Exemptions and deductions available under income tax for property sale
Here are some important exemptions and deductions available under Indian tax laws that can reduce your tax burden:
Section 54: Exemption on long-term capital gains if the proceeds are used to purchase another residential property within 1 year before or 2 years after the sale.
Section 54F: Exemption available if the sale proceeds are used to buy a new residential property, regardless of whether the property sold is residential or not.
Section 54EC: Capital gains can be invested in specified bonds (such as NHAI or REC bonds) to claim tax exemption, provided the investment is made within 6 months of the sale.
Recent amendments in income tax laws affecting property sales
In recent years, there have been several amendments to the Income Tax laws that affect property transactions. For example, the introduction of a surcharge on the capital gains tax for high-income earners has had an impact on taxpayers selling high-value properties. Additionally, new provisions have come into effect to allow taxpayers to carry forward losses arising from capital gains under certain conditions.
It is always recommended to stay updated on the latest amendments and consult a tax professional before selling property to ensure compliance with the law.
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Tax implications for NRIs selling property in India
For Non-Resident Indians (NRIs), capital gains tax on property sales in India is applicable just like for residents, but there are some key differences. The primary difference lies in the TDS (Tax Deducted at Source) rates, which are higher for NRIs. NRIs are subject to TDS at 20% on long-term capital gains and 30% on short-term capital gains. It’s crucial for NRIs to seek professional advice regarding tax implications in both India and their country of residence.
Steps to pay TDS online for property transactions
Step 1: Log in to the income tax portal
Go to the official e-filing portal (https://www.incometax.gov.in/iec/foportal/) and log in with your credentials.
Step 2: Access the payment section
Under the ‘e-File’ menu, click on ‘e-Pay Tax’ and then select ‘New Payment’.
Step 3: Select Form 26QB
Choose ‘Proceed’ under the 26QB (TDS on Sale of Property) option. Fill in all required details including seller and buyer PAN, communication details, residential status, property details, and transaction amount.
Step 4: Make payment
Select the payment method (Net Banking, Debit Card, Bank Counter, RTGS/NEFT, or Payment Gateway) and complete the transaction.
Step 5: Generate challan
On successful payment, a challan counterfoil with CIN, payment details, and bank name will be generated. This serves as proof of payment. Later, Form 16B (TDS certificate) can be downloaded as evidence of tax deduction.
Common mistakes to avoid when filing income tax on property sales
Failing to calculate the correct holding period and categorising the gain incorrectly can lead to errors in reporting capital gain tax on property.
Not applying for exemptions or deductions available under sections like 54, 54F, and 54EC, which help reduce tax liability.
Missing the deadline for reinvesting the proceeds in a new property or specified bonds, resulting in losing potential exemptions.
Incorrectly calculating the indexed cost of acquisition for long-term capital gains, which may increase the taxable amount unnecessarily.
How to save on taxes when selling property?
Invest in Another Property: Utilise exemptions under sections 54 and 54F to save on taxes by reinvesting in residential properties.
Indexation: Use the benefit of indexation to reduce your capital gains tax for long-term property sales.
Set off Losses: If you have made capital losses, you can offset them against your capital gains to reduce the tax liability.
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Impact of holding period on capital gains tax
The holding period of a property determines whether the profit is taxed as short-term or long-term capital gain. If a property is sold within 24 months of purchase, the profit is treated as Short-Term Capital Gain (STCG) and taxed as per the applicable income tax slab, which can go up to 30%.
If the property is held for more than 24 months, the profit is considered Long-Term Capital Gain (LTCG). It is taxed at 20% with the benefit of indexation, which adjusts the purchase price for inflation and reduces the taxable amount. In a nutshell, the holding period has a direct impact on your overall tax liability and potential savings.
Role of indexation in calculating long-term capital gains
Indexation plays a crucial role in calculating long-term capital gains (LTCG) by adjusting the property's acquisition cost for inflation. The Cost Inflation Index (CII) is used to determine the inflation-adjusted cost of the property, which reduces the taxable capital gain. This allows the taxpayer to account for the decrease in the value of money over time, resulting in a lower taxable gain. By applying indexation, the long-term capital gains tax burden is reduced, as the adjusted cost of acquisition is higher, leading to a lower taxable gain and consequently, lower tax liability on the sale of property.
Tax benefits of reinvesting capital gains into new property
Reinvesting capital gains into a new property offers significant tax benefits under Section 54 and Section 54F of the Income Tax Act. If the capital gains from the sale of a residential property are reinvested into another residential property within a specified time frame, the taxpayer can claim an exemption on the long-term capital gains tax. Section 54 allows exemption when the entire gain is invested in a new residential property, while Section 54F provides similar benefits for non-residential property sales, provided the net sale proceeds are invested in a new residential property, thus reducing tax liabilities.
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Conclusion
Understanding the tax implications of selling property is essential for maximising your financial outcomes. By knowing how to calculate capital gain on property, you can ensure that you comply with tax laws while minimising your tax liabilities. Through strategic planning, exemptions, and deductions, you can make the most of your property sale. It is advisable to consult a financial professional to stay up-to-date with the latest tax rules and optimise your property sale experience.
