Have you sold any property recently? If yes, you may be liable to pay capital gain tax on property sale. In this article I have explained all concepts related to it.
A house is treated as capital asset in income tax for the purpose of calculation of capital Gain tax. If you sale a house, either it will be profit or loss transaction. If there is profit, you need to pay tax on such gain amount. And if it is loss, then it will get adjusted with other capital gain or carries forward for next years upto eight assessment year. Capital loss can be adjusted only capital gain of the same year or the next 8 years.
Income tax section for tax on sale of property
Section 45 provides that any profit or gains arising from the sale of a house property in the previous year will be chargeable to income-tax under the head ‘Capital Gains’. Such capital gains will be deemed to be the income of the previous year in which the transfer took place.
Example – A purchased a house on 01.07.2010 for Rs. 20,00,000. This house is sold by him on 15.08.2019 for Rs. 25,00,000. Thus the capital gain arising from the sale of house shall be chargeable to tax under capital gain in the previous year 2019-20.
The charging section mainly focuses on the operation of two particular terms, namely; “Capital Asset” and “Transfer”. The definitions explained hereon.
When a house is not treated as capital Asset?
A house of below nature will be excluded from Capital asset definition. And no capital gain tax is charged.
- Stock-in-trade (such sale of house will be taxed as business income)
- Rural agricultural land [agricultural land in India which is not situated in any specified area]
Example: if ABC ltd. held several properties i.e. house and land to sale for the purpose of his business. In that case, these properties are not considered as capital asset. These houses and land are held by ABC Ltd. as stock in trade.
Meaning of “sale of house”
Capital gain tax is levied on all transfer of house property. The definition of transfer is given below.
Section 2(47) contains an inclusive definition of the term “transfer”.
- The sale, exchange or relinquishment of the asset; or
- The extinguishment of any rights therein; or
- The compulsory acquisition thereof under any law; or
- The owner of a capital asset may convert the same into the stock-in-trade of a business carried on by him. Such conversion is considered transfer; or
- Part-performance of the contract; sometimes, possession of an immovable property is given in consideration of part-performance of a contract.
- Any transaction which has the effect of transferring, or enabling the enjoyment of any immovable property.
Capital Gain Types
The tax on sale of house property is dependent on the categorisation of the house property as long-term or short-term capital
|
|
Short term capital gain |
Long term capital gain |
|
Period of holding the property |
24 month or less than 24 month |
More than 24 month |
Previously the period of holding is 36 months. From the A/Y 2018-19, the period of holding of any immovable property will be reduced from 36 months to 24 months.
Calculation of Tax for short term capital gain
To compute the capital gains on sale of house property the following method is to be followed;
- Computing short-term capital gain is to be done by deducting the sum of the following costs from the final sale price of the house property;
- Acquisition cost-
- House improvement cost
- Transfer cost
i.e. the calculation is as follows;
|
Particulars |
Amount in rupees |
|
Sale price of the house |
XXXXXX |
|
Less: any transfer expenses such as brokerage or commission |
XXXXXX |
|
Net sale consideration |
XXXXXX |
|
Less: acquisition price of the house |
XXXXXX |
|
Less: house improvement costs |
XXXXXX |
|
Less: any exemptions available under section 54B, 54D, 54G, 54GA |
XXXXXX |
|
Short-term Capital Gain |
XXXXXX |
Example- A acquired the property on 16.05.2018 for Rs. 20,40,000 and paid 60,000 as registration charges. In 28.12.2019, A sold the property for Rs. 30,00,000 and paid the brokerage of Rs. 40,000. The holding period of the property is less than 24 months. So the capital gain from the transaction is short term capital gain.
Sale consideration 30,00,000
Less- brokerage 40,000
Net sale consideration 29,60,000
Less- cost of acquisition 21,00,000
Short term capital gain 8,60,000
Calculation of tax on long term capital gain
|
Particulars |
Amount in rupees |
|
Sale price of the house |
XXXXX |
|
Less: any transfer expenses such as brokerage, commission etc. |
XXXXX |
|
Net sale consideration |
XXXXX |
|
Less: indexed acquisition cost of the house |
XXXXX |
|
Less: indexed house improvement costs |
XXXXX |
|
Gross long-term capital gain |
XXXXX |
|
Less: any exemptions available under section 54, 54B, 54D, 54EC, 54ED, 54F, 54G |
XXXXX |
|
Net Long-Term Capital Gain |
XXXXX |
Indexed acquisition cost = Cost of acquisition X Cost inflation index of the year of transfer of capital asset / Cost inflation index of the year of acquisition
Indexed improved cost = Cost of improvement X Cost inflation index of the year of transfer of capital asset / Cost inflation index of the year of improvement
Cost inflation index notified by the Central Government are as follows:
|
S.No. |
Financial Year |
Cost inflation Index |
|
1 |
2001-02 |
100 |
|
2 |
2002-03 |
105 |
|
3 |
2003-04 |
109 |
|
4 |
2004-05 |
113 |
|
5 |
2005-06 |
117 |
|
6 |
2006-07 |
122 |
|
7 |
2007-08 |
129 |
|
8 |
2008-09 |
137 |
|
9 |
2009-10 |
148 |
|
10 |
2010-11 |
167 |
|
11 |
2011-12 |
184 |
|
12 |
2012-13 |
200 |
|
13 |
2013-14 |
220 |
|
14 |
2014-15 |
240 |
|
15 |
2015-16 |
254 |
|
16 |
2016-17 |
264 |
|
17 |
2017-18 |
272 |
|
18 |
2018-19 |
280 |
|
19 |
2019-20 |
289 |
|
20 |
2020-21 |
301 |
Capital gain tax rates on sale of property
The capital gain on property shall be taxed are at following rates;
- Short term capital gain – Short term capital gain on property shall be added to other income of the person and will be taxed as per normal slab rate.
Example-
B, a resident of india , age 81 years has the following income-
Income from salary 4,90,000
Interest on fixed deposit 8,000
Short term capital gain 10,000
Total income 5,08,000
Total tax payable 1,600
Add: SHC 48
Total tax payable 1,648
Rounded off 1,650
- Long term capital gain- Long term capital gain on property shall be taxed at the rate of 20%.
Example: R purchased a house 28.06.2005 for Rs. 41,00,000 and paid Rs.10,000 as registration charges. On 15.06.2006 he spent Rs. 1,80,000 on improvement of the house. The house was sold on Rs. 25,00,000. Commission of Rs. 45,000 was paid on the sale of the house.
Sale consideration 25,00,000
Less- expenses 45,000
Less- indexed cost of acquisition – 42,00,000 X 272/117 9,76,410
Less- indexed cost of improvement- 1,80,000 X 272/122 4,01,311 14,22,721
Long term capital gain 10,77,279
Tax on long term capital gain 10,72,279 X 20% = 2,15,456
Tax planning to save tax on sale of Property
Thera are some provisions in which Capital gain from property sale can be exempted from tax subject to the fulfilment of the certain conditions:
- Capital gain arising on the transfer of residential house is exempt if the person has purchased one residential house in india within 2 years or constructed one residential house within 3 years.(u/s 54)
- Capital gain arising on the transfer of agricultural land is exempt , if the person has purchased the another agricultural land within the period of 2 years after the date transfer. (u/s 54B)
However the above exemption is allowed on the fulfilment of the some conditions alongwith the above mentioned condition.
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