Long term capital gain tax on property

Long-term capital gain tax on property is taxed at 20%, plus any applicable cess and surcharge. Short-term capital gains are taxed at the standard income tax rates.
Long-term capital gain tax on property
3 min
12-June-2024

According to the Income Tax Act, 1961, a capital gain from property is considered long term when the immovable property has been held for more than 24 months. Such gains are subject to taxation under the rules governing Long-Term Capital Gains (LTCG) tax on property. If you are planning to sell a house property any time soon, or if you have purchased a property as a long-term investment, you need to know how the potential gains on this capital asset are taxed. In this article, we will explore how the long-term capital gains or LTCG on property sales are taxed as per the Income Tax Act.

What is a long-term capital gain tax on property?

Long-term capital gains are profits earned from the sale of capital assets that have been held for a specified minimum period. For immovable assets like house properties, this minimum holding period is 2 years or 24 months. So, any profits you make from the sale of a house property that has been held for 24 months or more are considered long-term capital gains on the house property.

How to calculate the long-term capital gains on property

To understand the calculation of LTCG on property, you need to be familiar with the following terms and metrics.

  • Full value of consideration
    In simple terms, this is the sale value of the house property. It includes consideration received in cash and/or kind.
  • Expenses on transfer
    This includes any direct or indirect expenses you may incur during the sale. They are subtracted from the sale value.
  • Cost of acquisition
    This is the cost at which you purchased the house property.
  • Cost of improvement
    This term refers to the expenses you incurred during the holding period to make any changes, upgrades and improvements to the house property.
  • Indexation
    Indexation is the process of adjusting a historical cost to account for inflation and bring it to be at par with the present-day value of money. To calculate LTCG on property sales, you need to adjust the cost of acquisition and the cost of improvements, if any, for inflation. This will give you the indexed cost of acquisition and the indexed cost of improvement respectively.
  • Cost Inflation Index (CII)
    To compute these indexed costs, you need to use the Cost Inflation Index (CII), which is a metric that helps you adjust any amount for inflation. CII values are declared by the government for each financial year.

Here is the formula of the Indexed Cost:

Indexed cost = Original cost of acquisition or improvement x (CII for the year of sale ÷ CII for the year of purchase)

Cost Inflation Index Table from FY 2001-02 to FY 2023-24:

Financial Year

Cost Inflation Index (CII)

2001-02 (Base year)

100

2002-03

105

2003-04

109

2004-05

113

2005-06

117

2006-07

122

2007-08

129

2008-09

137

2009-10

148

2010-11

167

2011-12

184

2012-13

200

2013-14

220

2014-15

240

2015-16

254

2016-17

264

2017-18

272

2018-19

280

2019-20

289

2020-21

301

2021-22

317

2022-23

331

2023-24

348

 

Example of calculation of LTCG on property

Let us discuss an example for the calculation of LTCG on property. The general process for computing the LTCG is as follows:

Step 1: Begin with the full value of consideration i.e. the sale value.

Step 2: Subtract the expenses incurred during the sale.

Step 3: Subtract the indexed cost of acquisition.

Step 4: Subtract the indexed cost of improvement.

Step 5: Arrive at the long-term capital gains on the house property.

The formula for the indexed cost of acquisition or improvement is given below:

Indexed cost of acquisition or improvement = Original cost of acquisition or improvement x (CII for the year of sale ÷ CII for the year of purchase)

Check out the table below for a hypothetical example of how the LTCG on property sales is calculated using the above-mentioned steps and formula.

Particulars Amount Calculation
Sale value (A) Rs. 50,50,000  
Expenses on transfer (B) Rs. 50,000  
Year of sale FY 2023-24  
CII for the year of sale 348  
Cost of purchase Rs. 10,00,000  
Year of purchase FY 2004-05  
CII for the year of purchase 113  
Indexed cost of purchase (C) Rs. 30,79,646 = Rs. 10,00,000 x (348 ÷ 113)
Cost of improvements Rs. 12,00,000  
Year of improvements FY 2013-14  
CII for the year of improvements 220  
Indexed cost of improvements (D) Rs. 18,98,182 = Rs. 12,00,000 x (348 ÷ 220)
LTCG on the sale of property (A — B — C — D) Rs. 22,172  

 

Long-term capital gains tax on property sale

Long-term capital gain tax on property sales is levied at 20%. So, in the above example, the LTCG tax will be Rs. 4,434.40 (i.e. Rs. 22,172 x 20%).

What are tax exemptions on long-term capital gains on property sales?

The Income Tax Act offers relief on the LTCG tax in section 54 and section 54F. Check out the details below.

Section 54

Section 54 says that the amount of LTCG that is reinvested in the purchase or construction of a new residential property is exempt from tax.

Section 54EC

Section 54EC says that the amount of LTCG that is reinvested in capital gains bonds issued by bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC), among others, is exempt from tax.

Section 54B: Exemption for reinvested agricultural land

This exemption applies if you sell agricultural land located outside rural areas and reinvest the capital gains in another agricultural land within two years of the sale. You have until the filing deadline for your tax return for the relevant financial year to reinvest the capital gains. An alternative option exists: deposit the capital gains amount in a bank and reinvest it within two years. This prevents the gains from becoming short-term, which would disqualify them from the exemption. If you sell the newly acquired agricultural land within three years of purchase, the tax exemption on the original sale may be revoked.

Section 54F: Exemption for reinvested capital gains

This section offers tax exemption for capital gains from selling long-term assets (excluding residential properties) under specific reinvestment conditions. The entire sale proceeds must be used to purchase one or two residential properties within 24 months of the sale. Alternatively, the capital gains and sale proceeds can be used for a residential construction project, provided construction is completed within three years of the sale date. If you don't reinvest the entire sale proceeds, the tax exemption will only apply proportionally to the reinvested amount, not the entire capital gain.

Conclusion

This sums up the fundamentals of LTCG on property sales and how the gains are taxed. Keep in mind that the sale or redemption of any capital asset can result in LTCG. This includes mutual funds as well.

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Frequently asked questions

How is the LTCG from the sale of a property taxed?
The LTCG on property sale is taxed at a flat rate of 20%. However, indexation benefits apply to the cost of purchasing the property and the cost of improvements made, if any.
Are the capital gains from the sale of a property exempt from tax?
No, the capital gains from selling a property are not tax-free. They are subject to tax at 20%. However, you can gain exemption by reinvesting the LTCG in eligible assets as specified in the Income Tax Act.
How much tax do I need to pay if I sell my property?
Short-term capital gains from the sale of property are taxed as per your income tax slab rate, while long-term capital gains are taxed at 20% with indexation benefits.
How do you calculate long-term capital gains on a property?

To calculate long-term capital gains on a property, subtract the purchase price, cost of improvements, and acquisition costs from the selling price. Apply indexation to adjust the purchase price for inflation, then deduct any applicable exemptions or deductions to determine the taxable capital gains.

How do I avoid long-term capital gains tax on my property?

To avoid long-term capital gains tax on property, consider reinvesting the proceeds into another eligible property within the specified timeframe under Section 54 or Section 54F of the Income Tax Act. Additionally, utilising exemptions or investing in capital gains bonds can help defer or minimize tax liabilities.

How much capital gain is tax-free on property?

The tax-free capital gain on property varies based on factors such as the type of property, holding period, and reinvestment options. Generally, under Section 54 of the Income Tax Act, individuals can claim exemptions on capital gains from property sales by reinvesting in specified assets within prescribed time frames.

What is the exemption for long-term capital gains tax?

Long-term capital gains tax exemptions depend on factors like the type of asset, holding period, and reinvestment options. For instance, under Section 54 or Section 54F of the Income Tax Act, individuals can claim exemptions on capital gains from property sales by reinvesting in eligible assets within specified time limits.

How to calculate long-term capital gain on sale of property?

To calculate long-term capital gains on the sale of property, subtract the property's indexed cost of acquisition (purchase price adjusted for inflation) and indexed cost of improvements from the selling price. Deduct any allowable expenses or exemptions to determine the taxable capital gains, subject to applicable tax rates.

Is the sale of a house property exempt from capital gains?

The sale of a house property may be exempt from capital gains tax if specific conditions are met. Under Section 54 of the Income Tax Act, individuals can claim exemptions on long-term capital gains from the sale of a residential property by reinvesting in another residential property within specified time frames.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.