We take a look at how income from sale of property is taxed and the possible ways of avoiding it in the assessment year 2022-23.
Capital Gains Tax On Property
Capital gains refer to the profits or gains obtained when capital assets are sold or transferred. These capital assets encompass various types of legally owned property, including movable or immovable, tangible or intangible assets.
Examples of capital assets include residential properties, equity shares, equity-oriented funds, automobiles, land plots, buildings, gold, and so on. Any profit earned from the sale of these assets is categorised as capital gains and is subject to taxation under the ‘Capital Gains’ income category.
If your primary source of income involves buying and selling capital assets, the profits derived from such activities are considered under the ‘Income from business or profession’ category.
Specifically, capital gains tax is imposed on the monetary profit gained from the sale or transfer of residential properties or lands by individuals who do not consider it a profession or their main source of income.
Long-Term Capital Gains Vs Short Term Capital Gains
There are two classifications for capital assets based on the duration of ownership by the seller: long-term capital assets and short-term capital assets.
The capital gains derived from each type of asset are categorized accordingly as long-term capital gains or short-term capital gains.
A short-term capital asset refers to any asset held by an individual for 36 months or less before its sale or transfer. However, for immovable properties such as homes, the qualifying period for a short-term capital asset is 24 months or less, provided the selling process occurs after March 31, 2017.
On the other hand, an asset held for more than 36 months or 24 months, depending on the nature of the asset, is considered a long-term capital asset. If you sell a residential property after holding it for 24 months or longer, any profits from that transaction will be regarded as long-term capital gains.
The taxation of capital gains on property differs between these two categories.
The tax rates for long-term and short-term capital gains can be described as follows:
|
Conditions |
Type of Gain |
Tax Rate |
|
Selling a property within 24 months of acquisition, after March 31, 2017 |
Short-term capital gain | The gain will be added to the individual’s existing income and taxed based on the applicable tax slab. |
| Selling a property after 24 months, following March 31, 2017 | Long-term capital gain |
20% |
Capital Gains Tax on Property for LTCG and STCG
Capital gains represent the profits derived from the sale or transfer of any legally owned capital asset, encompassing both movable and immovable property, tangible and intangible items. The capital gains tax on property refers to the tax paid on the profit earned through the sale of a property. It’s important to note that the tax is imposed solely on the profit earned and not on the entire sale value of the property.
Examples of capital assets include:
Automobiles: Cars, motorcycles, and other vehicles utilized for personal or commercial purposes.
Residential properties: Houses, apartments, or any property utilized for residential use.
Gold: Physical gold in the form of jewelry, bars, coins, or ornaments.
Buildings: Commercial or industrial structures used for business operations or rental purposes.
Equity-oriented funds: Mutual funds or investment schemes primarily invest in stocks or equity-related instruments.
Land plots: Vacant land or plots suitable for various purposes such as construction, farming, or development.
Equity shares: Ownership shares of a company or corporation held by individuals as investments in the stock market.
If an individual’s primary source of income revolves around buying and selling capital assets, the profits generated from such activities are considered as ‘Income from business or profession.’ Capital gains tax on property specifically applies to the monetary profit obtained from the sale or transfer of residential properties or lands by individuals who do not consider it a profession or whose primary source of income is not derived from such activities.
There are two types of capital gains based on the duration of asset ownership: long-term capital gain and short-term capital gain.
Short-term Capital Gain or STCG
Short-term capital assets are assets held by an individual for a period of 36 months or less before being sold or transferred. However, for immovable properties like homes, the qualifying duration to be classified as a short-term capital asset is 24 months or less, provided the selling process occurs after March 31, 2017.
How to Calculate Short-term Capital Gain
To calculate the short-term capital gain, subtract the net consideration received (after deducting relevant expenses) from the cost of the property. This will give you the final amount of the short-term capital gain.
There are four essential factors to consider when computing the short-term capital gain from the sale or transfer of property:
- Consideration received: This refers to the total value of money or other assets received in exchange for selling or transferring the property.
- Cost of acquiring the property: This is the amount of money spent to initially purchase the property.
- Cost of improvements or renovations: If any enhancements, modifications, or renovations were made to the property after its purchase, the cost of these changes can be added to the acquisition cost.
- Expenses related to the sale or transfer: Expenses incurred during the sale or transfer process, such as brokerage fees or legal fees, can be deducted from the sale price to determine the net consideration received.
Please note that the tax rate for short-term capital gains is generally higher than that of long-term capital gains.
The tax rate on capital gains varies depending on whether the gain is short-term or long-term. If a property is sold within 24 months of its acquisition after March 31, 2017, the gain is considered a short-term capital gain. It is added to the individual’s existing income and taxed according to the applicable income tax slab.
Exemptions to Capital Gains on Sale of Property as Per the Law
Individuals can avail exemptions from Capital Gain Tax on Property by making specific types of reinvestments after receiving the consideration from long-term capital gains. There are four sections, namely 54, 54B, 54F, and 54EC, under which tax exemptions are available.
Section 54
Individuals have the opportunity to claim a tax exemption on capital gains from the sale of a property under Section 54 of the Income Tax Act, subject to specific conditions. Here are the key details:
- Reinvestment in housing properties: Individuals can reinvest the capital gain from the sale of a property in a maximum of two housing properties. Previously, only one property could be invested in.
- Reinvestment amount: Only the amount of capital gain is eligible for reinvestment, not the entire sales consideration. The total capital gain should not exceed ₹ 2 crores.
- Timeframe for reinvestment: The investment should be made either one year before the sale or within two years after the sale. This exemption can only be claimed once by an individual.
- Construction project investment: Capital gain can also be invested in a construction project. However, the construction must be completed within three years from the date of the sale to avail the exemption. If not completed within this period, the exemption will be revoked.
- Selling the new property: If the newly purchased property is sold within three years of acquisition, the earlier tax exemption will be revoked, and capital gains tax will be applicable on the sale.
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It is crucial to fulfil these conditions in order to avail the tax exemption on capital gains from the sale of a property.
Section 54B
Individuals who have earned capital gains from the sale of agricultural land located outside a rural area can benefit from the tax exemption provided by Section 54B of the Income Tax Act. To avail this exemption on capital gains from the sale of agricultural land used for agricultural purposes outside a rural area, it is essential to meet the following conditions and guidelines. Here are the key details:
- Definition of rural area: A rural area is defined as a location situated at least 2 km beyond the local limits of a municipal corporation or cantonment board. It should have a population of at least 10,000 but less than 1 lakh.
- Reinvestment in agricultural land: To qualify for the exemption, the taxpayer must reinvest the capital gain by purchasing another agricultural land within two years from the date of the sale.
- Exemption on capital gain: The exemption is applicable only to the amount of capital gain and not the entire sale consideration. The amount of exemption is calculated based on the reinvestment made in the new agricultural land, subject to certain limits.
- Exemption limitations: This exemption is specifically applicable to the purchase of agricultural land and does not cover residential properties or other assets.
- Selling the new land: If the newly purchased agricultural land is sold within three years from the date of acquisition, the exemption will be revoked, and the capital gains will become taxable.
It is important to adhere to these conditions and guidelines in order to benefit from the tax exemption on capital gains derived from the sale of agricultural land used for agricultural purposes outside a rural area.
Section 54EC
Individuals can avail tax exemption on capital gains from the sale of a housing property by reinvesting the gains in specific bonds issued by the NHAI (National Highway Authority of India) or REC (Rural Electrification Corporation) under Section 54EC of the Income Tax Act. Here are the key details:
- Maximum investment amount: The maximum amount that can be invested in these bonds to claim the exemption is ₹ 50 lakhs.
- Redemption period: The investment in these bonds can be redeemed after a period of 5 years from the date of sale. Prior to the Financial Year 2018-19, this period was 3 years.
- Timing of investment: The investment should be made either before filing taxes for the respective year or within six months from the date of sale.
- Depositing the amount: If an individual is unable to invest before filing taxes, they can deposit the amount in a PSU (Public Sector Undertaking) bank or any other bank listed under the Capital Gains Account Scheme (1988).
- Conversion of deposit: If the deposit is converted into an investment within 2 years from the date of sale, the exemption on capital gain tax will be considered valid.
- Unconverted deposit: However, if the deposit remains unconverted after 2 years, it will be treated as a short-term capital gain in the year of lapse.
By following these guidelines, individuals can benefit from the tax exemption on capital gains from the sale of a housing property by reinvesting the gains in specific bonds issued by the NHAI or REC under Section 54EC of the Income Tax Act.
Section 54F
To qualify for exemption from capital gains tax on property in India, several conditions must be met:
- The capital gain should arise from the sale of long-term capital assets other than a residential property
- The entire sale proceeds must be reinvested in up to two residential properties within a specified timeframe: either one year before or two years after the sale
- Alternatively, investment can be made in a construction project, which must be completed within three years from the sale date.
To claim full exemption on the entire capital gain amount, the individual must reinvest the entire sale proceeds. If unable to reinvest the full amount, the exemption is calculated proportionately based on the amount reinvested:
Exempted amount = (Capital Gains * cost of new house)/ net consideration amount
This formula determines the exempt portion of the capital gains based on the ratio of the reinvested amount to the total consideration received from the sale. It’s crucial to adhere to these guidelines to benefit from capital gains tax exemption effectively.
How to Save on Capital Gains Tax while Selling your Property?
Under Section 54 of the Income Tax Act, 1961, long-term capital gains obtained from the sale of a house property are exempt from taxation for individuals and Hindu Undivided Families, provided the following conditions are met:
- The capital gains are utilised to purchase or construct another house.
- The new house is purchased either one year before or two years after the sale of the old house.
- The new house is constructed within three years following the sale of the old house.
- Only one additional house property is purchased or constructed.
- The property being bought or developed is located within the national borders of India.
- The new house is not sold for a period of three years after taking possession of it.
- If the cost of the new property is lower than the sale amount, the exemption applies proportionately. The remaining amount can be reinvested within six months under Section 54EC.
In summary, individuals and Hindu Undivided Families can enjoy exemption from taxation on long-term capital gains from the sale of a house property if they fulfil the specified criteria mentioned under Section 54 of the Income Tax Act, 1961.
Set Off & Carry Forward of Losses on Sale of Immovable Property
When an immovable property is sold after being held for more than 24 months, any resulting loss is termed as Long-Term Capital Loss (LTCL). Under income tax rules, this LTCL can be set off against Long-Term Capital Gains (LTCG) from property sales only. If any LTCL remains after this set-off, it can be carried forward for up to 8 years, during which it can be applied only against LTCG.
Conversely, if the property is held for up to 24 months and a loss occurs upon sale, it qualifies as a Short-Term Capital Loss (STCL). In such cases, taxpayers have the flexibility to set off STCL against both Short-Term Capital Gains (STCG) and LTCG. Similar to LTCL, any unused STCL can be carried forward for 8 years and utilised against STCG and LTCG within this period.
Remember, to carry forward these losses, filing an Income Tax Return (ITR) is mandatory. As the ITR filing season is underway, ensure timely submission to manage and potentially reduce your capital gains tax liability effectively.
Exemptions to Capital Gains on Sale of Property As Per the Law
As per the Income Tax Act, if you have purchased any other property within one year prior to the sale of the capital gains from the sale of the property, you can use the value of this purchase and add to your total deductions against the consideration of the sale to arrive at your capital gains. So if the value of the purchase is more than the gains you make on the sale, you can gain complete exemption from Land Capital gain. But there is a condition.
This new property has to be held for a period of more than three years. If this property is sold within two years of purchase, the exemption availed on capital gains is reversed and the deduction becomes disallowed. The capital gains become liable to capital gains tax retroactively.
You can also avail an exemption from capital gains tax if the sale proceeds are invested into any other property or construction project within two years of Selling the Property. But for this the condition is applicable. This new property has to be held for at least three years for the exemption on capital gains to be valid.
FAQs on Capital Gain Tax on the Sale of Property
NRIs (Non-Resident Indians) who sell their property in India are obligated to pay taxes on the capital gains. The amount of tax to be paid will be determined by whether the gain is classified as long-term or short-term.
The short-term capital gains will be subject to tax at the applicable income tax slab rate, depending on your annual income. On the other hand, for long-term capital gains, the tax payable will be 20.8% with indexation.
The formula utilised to compute capital gains is as follows: Capital Gain = Final Sale Price - (Indexed House Improvement Cost + Indexed Acquisition Cost + Transfer Cost). Should an NRI pay taxes on gains made on the sale of property in India?
What is capital gains tax in India on property sale?
What is the formula that is used to calculate capital gains?
Conclusion:-
There are many ways to structure your income in a manner so you can avail as many tax benefits as possible. If you are planning on making an investment: https://indiainvestmentgrid.gov.in/ in a property or considering selling a property you already own, get in touch with us. Our experts will ensure that you receive the best advice possible to make sure that any capital gains you make are structured to ensure your transaction avoids as much taxation as possible.
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