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- Capital Gain Tax on Sale of Property: Capital Gain Calculation on Property Sale
Updated on: 10 Sep, 2024 11:55 AM
Budget 2024 Updates
Amendment to Finance Bill 2024
Earlier, the government removed the indexation benefit on the sale of immovable property. However, the amendment of Finance Bill 2024 introduced a rollback of this rule.
As per the latest amendment, for any immovable property acquired before 23rd July 2024, the taxpayers will have the option to choose between two LTCG computation methods -
- 12.5% tax rate, without indexation
- 20% tax rate with indexation benefit.
The taxpayers can compute their tax based on both these methods and select the one that reduces their tax burden.
In other words, now taxpayers will be able to claim the benefit of indexation if they choose to pay tax at 20%. They will also get the opportunity to save tax by choosing the method of computing taxes.
However, there are certain exceptions to this amendment -
- Indexation benefit is only available on immovable property like land and buildings.
- It is available only to individuals and HUFs and not to firms or companies.
- It can be considered only for tax calculation and not for determining amount of investment or loss to claim exemption or carry forward.
Long-term capital gains
- Exemption on LTCG has been increased from Rs.1 lakh to Rs.1.25 lakhs per annum.
- LTCG rate on all financial as well as non-financial assets has been increased to 12.5%.
Short-term capital gains
- STCG on specified financial assets will be charged at 20%.
- STCG on other non-financial assets will be taxed at applicable slab rates.
- Unlisted bonds and debentures, debt mutual funds, and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
- To know more about it, contact our tax experts
Have you recently sold a property and are struggling to understand the capital gain tax on the sale of a property? Well, you are not alone.
While selling your property at a good profit is something you might be happy about, it also comes with its tax struggles. Any capital gain (profit) on selling a property is subject to capital gain tax. Don’t worry! In this article, we will help simplify capital gain tax on the sale of property in India for you. Let’s get started and save your capital gain tax.
Contents
- What are Capital Gains Tax on the Sale of a Property?
- What is Capital Gain Tax on Property Sale?
- LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison
- What are Tax Exemptions on Capital Gains on Property Sales?
- Capital Gain Tax Exemptions under Section 54, 54F, 54EC, and 54GB
- How to Calculate Capital Gain Tax on Property
- Why File Your ITR with Tax2win?
- FAQs on Capital Gain Tax on Sale of Property
What are Capital Gains Tax on the Sale of a Property?
Capital gains on the sale of a property in India refer to the profit an individual makes upon selling it at a price higher than its purchase cost. This profit is considered income and is subject to tax on the sale of property under the Income Tax Act.
What is Capital Gain Tax on Property Sale?
As per the Indian Income Tax Act, any capital gain arising from the sale of property is subject to tax. Property for the purpose of capital gain tax includes residential property, automobiles, land, buildings, gold, equity shares, and equity-oriented funds, etc.
Capital Gain Tax on sale of property can be divided into two types: short-term capital gain (STCG) and long-term capital gain (LTCG). This classification has been done on the basis of how long do you hold the property.
Short-term Capital Gain on Property Sale
Assets held for 36 months or less before being sold or transferred are categorized as short-term capital assets. For immovable properties like homes, this duration is 24 months or less, given the sale occurs after March 31, 2017.
Long-term Capital Gain on Property Sale
Assets held for more than 36 months are classified as long-term capital assets. Similarly, for immovable properties, this duration is 24 months if the sale happens after March 31, 2017.
Given below is the difference between short-term capital gain (STCG) and long-term capital gain (LTCG) on the sale of property, flat or any other immovable property.
| Capital Gain Tax Rates on Property | Short Term | Long Term |
|---|---|---|
| Condition | When the property owner sold a property after holding it for less than two years | When the property owner sold a property after holding it for more than two years |
| Taxation | Slab Rate | 20% with indexation |
For example, suppose you have sold a house or property that you have been holding for less than 24 months. Then, it will count in your gross total income for that financial year at the time of e-filing of your ITR. The taxes will be applicable according to the tax slab in which it will lie. Whereas if you’ve sold a property after holding it for more than 24 months, a 20% tax rate is applicable. However, this rate does not include the indexation used to analyze the purchase price of the sold property. Likewise, it reflects the consequences of inflation on the sale.
LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Taxation for mutual funds
| Product | Before | After | ||||
|---|---|---|---|---|---|---|
| Period of holding | Short Term | Long Term | Period of holding | Short Term | Long Term | |
| Equity oriented MF units | > 12 months | 15.00% | 10.00% | > 12 months | 20.00% | 12.50% |
| Specified Mutual funds which has more than 65% in debt | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | Slab rate |
| Equity FoFs | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Overseas FoF | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Gold Mutual Funds | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
What are Tax Exemptions on Capital Gains on Property Sales?
First of all, most of the tax exemptions available from capital gains on property are only allowed in the case of long-term capital gains on property. If you have a short-term capital gain from the sale of property, then such gains will be added to the total income and taxed at the applicable slab rates.
Given below are the criteria to avail of tax benefits on capital gains on property sale:
Exemptions on Short-Term Capital Gains (STCG) on Sale of Property
The basic exemptions for short-term capital gains on property are stated below:
- The resident or non-resident of India who is aged below 60 years are exempted from paying capital gains tax on the sale of property only if the total income is under the bar of Rs. 2,50,000.
- This exemption limit will increase for Indian residents who are aged between 60 and 80 years. They are allowed to take tax relief on total income up to Rs. 3,00,000 on a property sale.
Long-Term Capital Gains (LTCG) on Sale of Property
Depending on the kind of reinvestment, the investors can avail of tax exemptions under sections 54, 54GB, 54F, and 54EC of the Income Tax Act in India.
Exemptions from Capital Gain Tax on Sale of Property
Tax Exemption under Section 54
To qualify for an exemption under Section 54, an individual must meet the following criteria:
- Classification as Long-Term Capital Asset: The asset must be classified as a long-term capital asset.
- Residential House Sale: The asset sold must be a residential house, and the income from such a house should be chargeable as "Income from House Property".
- Purchase or Construction Timeline:
- The seller must purchase a residential house either within 1 year before or 2 years after the date of sale/transfer.
- If constructing a house, the seller has up to 3 years from the date of sale/transfer.
- In the case of compulsory acquisition, the period for acquisition or construction is determined from the date of receipt of compensation (original or additional).
- Location of New House: The new residential house must be located in India. Purchasing a house abroad does not qualify for the exemption.
- Capital Gains Tax Exemption Limit: From April 1, 2023, the capital gains tax exemption under Section 54 to 54F is capped at Rs. 10 crore. Previously, there was no such limit.
- Cumulative Conditions: All conditions above must be met to avail of the exemption. If any condition is not fulfilled, the exemption cannot be claimed.
From the Assessment Year 2020-21 (FY 2019-20), an exemption is available for the purchase of up to two residential houses in India. This exemption is subject to the capital gain not exceeding Rs. 2 crore and can be claimed only once in the seller's lifetime.
Tax Exemption under Section 54F
To avail an exemption on capital gains tax on property in India under Section 54F, consider these parameters:
Reinvest the entire capital gain amount. If the entire amount is not reinvested, the exemption is calculated based on the amount invested. The calculation formula is:
Tax Exemption under Section 54EC
For an exemption under Section 54EC, an individual must meet the following conditions:
If unable to invest before filing taxes for that year, deposit the amount in a PSU bank or any bank listed under the Capital Gains Account Scheme (1988).
Convert this deposit into an investment within 2 years from the date of sale. Otherwise, it will be considered a short-term capital gain in the year the period lapses.
Tax Exemption under Section 54B
This exemption applies only to capital gains from the sale of agricultural land outside of a rural area. A rural area is described as follows:
To qualify for this exemption, the following conditions must be met:
If there is a delay in investment, deposit the amount in a bank under the long-term capital gains scheme.
Complete the investment within 2 years, or it will be treated as a short-term capital gain in the year of expiry.
Capital Gain Tax Exemptions under Section 54, 54F, 54EC, and 54GB
| Section | 54 | 54EC | 54F | 54GB |
|---|---|---|---|---|
| Eligibility | Any Individual / HUF | Any Taxpayer | Any Individual / HUF | Any Individual / HUF |
| Sold asset | Residential house/land | Long term capital asset /Land/building / or both | Long term asset other than Residential property | Residential property |
| Investment made in | New India Residential house (only 1) | Specific bonds of NHAI / RECL/PFC/IRFC | New Indian Residential house property (only 1) | Equity shares where assess holds 50%+ shares of the company |
| Time of purchase | Within 1 year before / 2 years after (if constructed within the time period of 3 years after transfer) | Within 6 months (after the transfer) | Within 1 year before / 2 years after (if constructed within the time period of 3 years after transfer) | Before the ITR due date |
| Special case | If sold within 3 years, capital gain (that was exempted earlier) will be deducted from its cost of acquisition. | On sale of securities within 5 years, LTCA (that was exempted earlier) is taxable in the year of sale. | If sold within 3 years, capital gain (that was exempted earlier) is taxable in the year of sale. | If sold within 5 years the capital gain (that was exempted earlier) is taxable in the year of sale. |
| Threshold | 10 cr |
How to Calculate Capital Gain on Property?
Short-term Capital Gain Tax Computation on property
The short-term capital gain or STCG on the property is the profit earned on a property sale that you have owned for less than 24 months.
Use the following formula for prudent capital gains on the property for the short term:
| Sale Consideration | 180000 |
| Less: Transfer Expenses | 5000 |
| Net sales Consideration | 175000 |
| Less: Cost of Acquisition | 150000 |
| Less: Cost of Improvement | 0 |
| Short-Term Capital Gain | 25000 |
Long-term Capital Gain Tax Computation on property
A long-term capital gain on the property is the profit earned on a property sale that you have owned for more than 24 months.
Use the following formula for prudent capital gains on the property for the long term:
| Sale Consideration as per Sec. 50C | 500000 | |
| Less: Transfer Expenses | 10000 | |
| Net sales Consideration | 490000 | |
| Less: Indexed Cost of Acquisition(2014-2015) (based on CII) | (250000/240*348) | 362500 |
| Less: Indexed Cost of Improvement | 0 | |
| Long-Term Capital Gain | 127500 |
Set Off & Carry Forward of Losses on Sale of Immovable Property
The loss incurred from the sale of an immovable property, held for a period exceeding 24 months, is classified as a Long-Term Capital Loss (LTCL). According to income tax regulations governing the set-off and carry forward of losses, the taxpayer has the option to offset LTCL against Long-Term Capital Gains on property exclusively. Any remaining loss can be carried forward for up to 8 years, with the provision to set it off only against LTCG during this period.
On the other hand, if the immovable property is held for up to 24 months, resulting in a loss upon sale, it is categorized as a Short-Term Capital Loss (STCL). In this scenario, the taxpayer has the flexibility to set off STCL against both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Similarly, any unabsorbed loss can be carried forward for 8 years and applied against STCG and LTCG only during this period.
Remember! If you want to carry forward your losses, you must file an ITR. The ITR filing season is already here. File your ITR and reduce your capital gain tax liability.
FAQs on Capital Gain Tax on Sale of Property
Q- How to avoid capital gain tax on the sale of properties?
The ideal way to save on capital gains tax on property sales is reinvesting. The whole money incurred from selling a property can be used for purchasing another residential property within a certain time frame.
Q- How to calculate property gain on property sale?
Use the following formulas for prudent capital gains on the property for short-term and long-term (assuming the sales year to be FY-2023-24)
| Sale Consideration | 180000 |
| Less: Transfer Expenses | 5000 |
| Net sales Consideration | 175000 |
| Less: Cost of Acquisition | 150000 |
| Less: Cost of Improvement | 0 |
| Short-Term Capital Gain | 25000 |
And
| Sale Consideration as per Sec. 50C | 500000 | |
| Less: Transfer Expenses | 10000 | |
| Net sales Consideration | 490000 | |
| Less: Indexed Cost of Acquisition(2014-2015) | (250000/240*348) | 362500 |
| Less: Indexed Cost of Improvement | 0 | |
| Long-Term Capital Gain | 127500 |
Q- How much tax on capital gains property sale?
At the present date, the long-term capital gain on property is calculated at a 20% tax rate with some additional cess and surcharge rates if applicable. However, short-term capital gain from a property is charged at the normal slab rate.
Q- Should I need to buy another property to save tax?
Taxpayers should reinvest the capital gain incurred by a property sale to buy another residential property. It will let them avail of tax relief under section 54. However, they can also invest in Sec.54EC specified bonds within a certain time frame
Q- Do I need to pay a 20% tax on all capital gains?
There are various rates under the Income Tax Act based on the type of asset and period of holding such assets. However, long-term capital gains from the sale of property are charged at 20%.
Q- Do I immediately need to pay my capital gains tax?
There is no hush-hush situation to pay your capital gains tax immediately. However, there are some specified due dates on which you need to pay advance tax to avoid interest under sections 234B and 234C at the time of filing the ITR.
Q- What did Budget 2024 propose in regard to removal of indexation benefits for properties?
The Budget 2024 has proposed removing indexation benefits on capital gains from the sale of long-term capital assets. Previously, property owners adjusted their purchase prices for inflation, reducing taxable profits. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit.
Individuals can still use the fair market value (FMV) as the cost of acquisition for assets purchased on or before April 1, 2001, when selling these assets.
The amendment to Finance Bill 2024 announced the restoration of indexation benefits on immovable property purchased before 23rd July 2024 for individuals and HUFs only for the purpose of computing tax. In other words, individuals can now choose between a 12.5% tax rate without an indexation benefit and a 20% tax rate with an indexation benefit.
Q- Is investing in another house property the only way to save LTCG tax on the sale of property? If not explain the other ways and how it works?
If you reinvest your capital gains in another property within a specified time period, you can claim an exemption under the following sections -
- Section 54: If the gains from selling a residential house are reinvested in another house property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount is exempt from tax.
- Section 54F: If the gains from selling any long-term asset are reinvested in a residential property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount can be claimed as a tax exemption.
However, there are other ways to save tax on LTCG from sale of property too. Given below are the alternative methods -
- Section 54EC Exemption: Invest capital gains in NHAI, REC, IRFC, or PFC bonds within 6 months of the sale for full tax exemption.
- Section 54GB Exemption: Reinvest proceeds from the sale of residential property into eligible start-ups within the specified timeframe to claim an exemption.
- Capital Gains Account Scheme (CGAS): If you can't invest in a new property immediately, deposit the gains in CGAS. The amount must be reinvested in a new house within 2 years to maintain the exemption. If not used within this period, the LTCG will be taxed in the year the gains were realized.
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CA Abhishek Soni
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
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