Capital Gain Tax on Sale of Property

Capital gains on property refer to the profit realized from selling real estate at a price higher than its purchase cost. In India, the tax treatment of capital gains from property sales is determined by the holding period of the asset prior to its sale. In this article I have explained in detail about the Capital Gain Tax on Sale of Property.

Types of Capital Gains:

1. Short-Term Capital Gains (STCG):

   If a property is sold within 24 months of acquisition, the resulting profit is classified as short-term capital gain. Short –term gains are often taxed as per the individual’s income tax slab rates, which can be quite high.

Short Term Capital Gain Calculation

Short-Term Capital Gains is calculated by subtracting the  acquisition cost and any expenses incurred during the transfer from the sale price.

Example:

• Purchase Details:
  • Date of Purchase: January 15, 2023
  • Purchase Price: ₹50,00,000
  • Registration & Legal Fees: ₹1,00,000
  • Total Acquisition Cost: ₹51,00,000​
• Sale Details:
  • Date of Sale: March 10, 2024
  • Sale Price: ₹65,00,000
  • Brokerage Paid: ₹1,00,000
  • Legal & Miscellaneous Expenses: ₹50,000
  • Total Sale Expenses: ₹1,50,000​
• Improvement Costs:
  • Renovation (e.g., kitchen upgrade): ₹2,00,000​

Calculation:

• Net Sale Consideration:
  • ₹65,00,000 (Sale Price) – ₹1,50,000 (Sale Expenses) = ₹63,50,000​
• Total Cost of Acquisition:
  • ₹51,00,000 (Purchase Price + Registration & Legal Fees) + ₹2,00,000 (Improvement Costs) = ₹53,00,000​
• Short-Term Capital Gain (STCG):
  • ₹63,50,000 (Net Sale Consideration) – ₹53,00,000 (Total Acquisition Cost) = ₹10,50,000​

Tax Implication:

• In this example, property is sold before 24 months, from the date of its acquisition. The profit calculated, is STCG i.e.₹10,50,000
• STCG is added to the individual’s total income and taxed as per the applicable income tax slab rates.​

Assuming the individual falls under the 30% tax bracket:

• Tax on STCG: 30% of ₹10,50,000 = ₹3,15,000
• Add: Health & Education Cess (4%): 4% of ₹3,15,000 = ₹12,600
• Total Tax Liability: ₹3,15,000 + ₹12,600 = ₹3,27,600​

Key Points

• Holding Period: If a property is sold within 24 months of acquisition, the profit is considered STCG.
• Tax Rate: STCG is taxed at the individual’s applicable income tax slab rate.
• Deductions: While specific exemptions like Section 54 are not available for STCG, one can deduct:

• • Improvement Costs: Expenses incurred for enhancing the property’s value (e.g., renovations).
  • Sale-related Expenses: Costs directly associated with the sale, such as brokerage, legal fees, and stamp duty.

Exemptions and Deductions:

Short-Term Capital Gains: While STCG on property doesn’t qualify for specific exemptions like long-term capital gains, certain deductions can still be claimed:​

• Standard Deductions:
  • Sale-related Expenses: Costs such as brokerage, legal fees, and stamp duty incurred during the sale can be deducted from the sale price to compute the net STCG.​
• Section 80C to 80U Deductions:
  • If your STCG is not covered under Section 111A (which pertains to equity shares and mutual funds), you can claim deductions under Sections 80C to 80U. These include investments in Public Provident Fund (PPF), National Savings Certificates (NSC), and other eligible instruments.

2. Long-Term Capital Gains (LTCG):

For properties held for more than 24 months, the profit is considered a long-term capital gain. Previously, LTCG was calculated by adjusting the acquisition cost for inflation (indexation) at 20%. However, The Finance (No. 2) Act, 2024, introduced significant changes to the taxation of Long-Term Capital Gains (LTCG) in India, effective from July 23, 2024. Here’s a concise summary of the key amendments:​

 Key Changes in LTCG Taxation

• Uniform Tax Rate of 12.5%
  A flat 12.5% tax rate now applies to all long-term capital gains, irrespective of the asset class. This replaces the earlier structure where different assets had varying tax rates and indexation benefits.
• Removal of Indexation Benefit
  The option to adjust the purchase price of assets for inflation (indexation) has been eliminated for assets sold on or after July 23, 2024. Previously, certain assets benefited from indexation, reducing taxable gains.
• Increased Exemption Limit
  The exemption limit for LTCG under Section 112A has been increased from ₹1 lakh to ₹1.25 lakh. Gains up to this amount in a financial year are exempt from tax.

 Applicability Based on Asset Acquisition Date

• Assets Acquired On or Before July 22, 2024:
  Taxpayers have the option to choose between:
  • 20% tax rate with indexation benefit, or
  • 12.5% tax rate without indexation.
    This choice allows taxpayers to select the method that results in a lower tax liability.
• Assets Acquired On or After July 23, 2024:
  A flat 12.5% tax rate without indexation applies.

Applicability to All Taxpayers

The revised LTCG tax provisions apply uniformly to all taxpayers, including:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Non-Resident Indians (NRIs)
  This uniformity aims to simplify the tax structure and reduce litigation. ​

Effective Date

These amendments are effective retrospectively from July 23, 2024, and apply to all relevant transactions from that date onwards.

Calculation of Long Term Capital Gain:

Example:

• Property Purchase:
  • Date: April 1, 2010
  • Purchase Price: ₹30,00,000​
• Property Sale:
  • Date: April 1, 2025
  • Sale Price: ₹1,00,00,000​
• Cost Inflation Index (CII):
  • FY 2010–11: 167
  • FY 2025–26: 348​

Option 1: LTCG with Indexation (Tax Rate: 20%)

Indexation adjusts the purchase price for inflation, reducing the taxable gain.​

Step 1: Calculate Indexed Purchase Price​

Indexed Purchase Price=Original Purchase Price×(CII in Year of Sale/CII in Year of Purchase​)​

=₹ 30,00,000 × (348/167) = ₹62,51,497

Step 2: Compute LTCG

LTCG    = Sale Price − Indexed Purchase Price

=₹ 1,00,00,000 − ₹ 62,51,497 = ₹ 37,48,503

Step 3: Calculate Tax Liability

• Tax @ 20%: ₹37,48,503 × 20% = ₹7,49,701
• Health & Education Cess @ 4%: ₹7,49,701 × 4% = ₹29,988
• Total Tax: ₹7,49,701 + ₹29,988 = ₹7,79,689​

Option 2: LTCG without Indexation (Tax Rate: 12.5%)

This option applies a flat tax rate without adjusting for inflation.​

Step 1: Compute LTCG

LTCG = Sale Price − Original Purchase Price ​

= ₹1,00,00,000 −₹30,00,000 = ₹70,00,000

Step 2: Calculate Tax Liability

• Tax @ 12.5%: ₹70,00,000 × 12.5% = ₹8,75,000
• Health & Education Cess @ 4%: ₹8,75,000 × 4% = ₹35,000
• Total Tax: ₹8,75,000 + ₹35,000 = ₹9,10,000​

Comparison:

Option	Tax Rate	Taxable Gain	Tax + Cess
With Indexation	20%	₹37,48,503	₹7,79,689
Without Indexation	12.5%	₹70,00,000	₹9,10,000

In this scenario, opting for indexation results in a lower tax liability.​

 Key Points:

1. Holding Period: Properties held for more than 24 months qualify for LTCG treatment.
2. Tax Options: For properties acquired before July 23, 2024, sellers can choose between:
   • 20% tax with indexation
   • 12.5% tax without indexation​
3. Strategic Choice: The optimal choice depends on factors like holding period and inflation. Generally, longer holding periods with significant inflation favor the indexation method.

:Cost Inflation Index (CII) Table for(FY) 2024–25.

The base year for the CII is 2001–02, with an index value of 100. This base year is used for calculating long-term capital gains on assets acquired on or after April 1, 2001

Exemptions and Deductions on Long Term Capital Gain Tax on Sale of Property.

Long-Term Capital Gains: To reduce tax liability on LTCG, individuals can invest in specific avenues:

• Section 54: Allows exemption if the capital gains are reinvested in purchasing or constructing another residential property within specified timelines.
• Section 54EC: Provides exemption if the gains are invested in certain bonds (like those issued by the National Highways Authority of India or Rural Electrification Corporation) within six months of the sale, subject to a maximum limit.

 Filing and Compliance:

It’s essential to report capital gains in the income tax return for the relevant assessment year. Non-compliance or incorrect reporting can attract penalties.