Capital Gain Tax on Sale of Property in India

Selling a property in India can be a lucrative venture, but it also means that you have to deal with the taxes, particularly the capital gains tax. If you own any property or invest in it, you need to know about capital gains tax in order to follow the regulations and make the most of your money.

Let’s take a closer look at capital gains tax, its computation, exemptions, and how it affects the sale of property in India.

Overview on Capital Gains

Capital gains represent profits derived from the sale of a capital asset, such as real estate, stock, or bonds. A capital gain is defined as the difference between the selling price and the original cost where an asset was sold at a price higher than the actual purchase price.

The profit made on a property sale attracts capital gains tax, which is a major determinant of the overall financial returns from an investment. Such knowledge would be helpful to property owners and investors regarding how capital gains are computed and the taxes applicable to such computation.

There are several exemptions and provisions under the Income Tax Act that can be used to reduce capital gains tax liabilities and, therefore, incentivize reinvestment in real estate and other eligible assets.

Types of Property Capital Gains

The Capital gains are categorized into two types based on the holding period:

Short-Term Capital Gains (STCG)

If a property is sold within 24 months of its purchase, the profit is classified as short-term capital gains. STCG is taxed at the applicable income tax slab rate of the seller.

Long-Term Capital Gains (LTCG)

If the property is held for more than 24 months before sale, the profit is treated as long-term capital gains. LTCG is taxed at a fixed rate of 20% with the benefit of indexation.

Key Amendments to Capital Gains Tax Effective from FY 2024-25

In the Union Budget 2024, there have been a few critical changes based on capital gain tax from the financial year 2024-25. Here are the key amendments:

• Simplification of Holding Periods: Holding periods for classifying such assets under the long term as well as short term shall be governed solely by only two holding periods, specifically 12 months and 24 months. The holding period of 36 months has been removed.
• Holding Period for Listed Securities: A 12-month holding period will be required for all listed securities.
• Long-term Status of Listed Securities: All listed securities held over the holding period of 12 months will be treated as long-term assets.
• Holding Period of Other Assets: For all other assets including immovable property, there is a holding period set at 24 months. Therefore, any property beyond the holding period of 12 months shall be considered as long-term.
• Short-term Capital Gains Tax: All short-term capital gains arising on the sale of property would still continue to be taxed at the applicable slab rates of income tax.
• Lowered Tax Rate on Long-term Capital Gains: The tax rate on LTCG from other financial and non-financial assets has been reduced from 20% to 12.5%.
• Indexation Relief: The indexation relief on the sale of long-term assets is completely abolished. This means that all the properties sold from July 23, 2024, will attract 12.5% tax without indexation benefit.

These provisions are part of the efforts of the government to make the tax laws of the country simple and hence encourage investment in various resources.

How to Determine Capital Gains in India?

Various factors need to be considered while calculating capital gains for short-term and long-term in India.

For Short-Term Capital Gain

• The total amount received or the complete value exchanged for the sale or transfer of the property.
• The original purchase price of the property in question.
• The expenses incurred for any enhancements, modifications, or renovations carried out on the property.
• Any costs directly associated with the sale or transfer of the property.

For Long-Term Capital Gain

• The seller gets the total payment when they sell or hand over the property.
• The indexed price of buying the property.
• The revised costs of any improvements or changes made to the property.
• Expenses that come up when selling or transferring the property.
• Tax exemptions that apply to the deal.

Exemptions Under Capital Gains Tax

When it comes to capital gains tax on property in India, certain exemptions can significantly ease the financial burden for individuals. Below are the key provisions under various sections of the Income Tax Act that provide exemptions:

Exception Criteria Under Section 54

• Following the Budget 2019, individuals can now reinvest capital gains into a maximum of two residential properties. Previously, the limit was just one. If no reinvestment occurs, the exemption will not be granted.
• Only the capital gains amount is eligible for reinvestment, not the entire sale consideration.
• The total capital gains should not exceed ₹2 Crore.
• The investment must occur either one year before the sale or within two years after it.
• This exemption is available to an individual only once during their lifetime.
• Individuals can also invest the capital gains in a construction project, provided the construction is completed within three years of the sale.
• If the newly acquired property is sold within three years of its purchase, the exemption will be revoked.

Exception Criteria Under Section 54F

• The capital gain must arise from the sale of long-term capital assets other than residential property.
• The entire sale consideration must be reinvested into a maximum of two residential properties following Budget 2019.
• Similar to Section 54, investments must occur within one year before the sale or within two years after the sale.
• Investments can also be directed toward a construction project, which must be completed within three years from the date of sale.
• If the entire consideration is not reinvested, the exemption will be calculated based on the invested amount using the formula:

Exempted Amount=(Capital Gains × Cost of New House) / Net Consideration Amount

Exception Criteria Under Section 54EC

• Capital gains from the sale of a housing property must be reinvested in bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC).
• The amount of maximum investment should not be more than ₹50 Lakhs.
• The investment can only be redeemed after five years from the date of sale, an extension from the previous three-year period established in the Financial Year 2018-19.
• The reinvestment should be done before filing taxes for that financial year or within the period of six months from the date of sale.
• If an individual cannot invest before filing taxes, they may deposit the amount in a PSU bank or another bank listed under the Capital Gains Account Scheme (1988). The deposited amount must be converted into an investment within two years from the sale date; otherwise, it will be treated as a short-term capital gain.

Exception Criteria Under Section 54B

• The capital gains must be reinvested in new agricultural land within two years of the sale.
• The exemption will be nullified if the newly acquired land is sold within three years of purchase.
• Investments must occur before filing taxes in the same financial year to qualify for the exemption.

Final Words

Capital gains tax on the sale of property in India is an essential consideration for property owners and investors. Understanding the available exemptions can significantly influence your financial outcome.

With careful planning and compliance, you can optimize your capital gains tax liability and make informed decisions regarding your real estate investments. As the real estate market continues to evolve, staying informed about tax regulations will be crucial for maximizing returns on property sales in India.