Capital Gains Tax on Sale of Property: Meaning, Calculation And Tips To Get Tax Exemption

Income Tax

Are you a property owner looking to sell your property? 

If that is the case, note that you will be liable to pay capital gains tax on sale of property. The tax rate on your capital gains will depend upon the duration for which the property was held by you. Read on to know about taxation of capital gains on sale of property in detail.

Understanding Capital Gains Tax on Sale of Property

On the sale of property, be it a home or land, you are liable to pay tax on capital gains. Capital gain is the profit you receive from selling your property. For example, if you purchased a property 30 years ago, the said property’s value would have appreciated from the purchase value you paid so many years ago. When you sell the asset, you earn capital gains on the property, and you are hence liable to pay tax on these profits.

These gains are classified into two types — short term capital gains and long term capital gains. If you kept a property for a period shorter than 2 years, gains realised upon the sale of the asset will be termed as short term capital gains (STCG). Similarly, gains earned from a property that was held for more than 2 years will be classified as long term capital gains (LTCG).

In case of STCG, the property owner is liable to pay tax depending upon his/her income tax slab. Meanwhile, for LTCG, the tax rate is set at 20%.

Also Read: Tax Deductions Under Section 80C to 80U

Process to Calculate Capital Gains Tax on Sale of Property

The capital gains tax calculation depends upon the tenure for which the owner has held the property. However, before diving into the calculation formulae, let us understand a few crucial terms regarding this calculation. 

• Full value consideration

This is a consideration that the property seller receives in return for his/her property.

• Cost of acquisition

It is the value at which the seller acquired the asset.

• Cost of improvement

This indicates the expenses incurred by a seller for any additions or changes to the property.

• Cost of transfer

Cost of transfer refers to brokerage fees, registry charges or any other charges involved during asset sale.

• Indexed cost of improvement

This is calculated by multiplying the actual cost of improvement and that year’s CII (Cost Inflation Index), then dividing the result by CII of the year during which the improvement occurs.

• Indexed cost of acquisition

It is calculated by considering CII to adjust the inflation values that had occurred over the years when the owner held the asset.

Now that you know these common terms, take a look at the formulae to calculate short and long term capital gains tax on sale of property.  

1. Formula to calculate STCG

To calculate short term capital gains, you can apply this formula:

STCG = Final sale price – (Home improvement cost + Cost of acquisition + Cost of transfer).

Tax on STCG will be levied as per the taxpayer’s tax slab.

2. Formula to calculate LTCG

To calculate long term capital gains, apply this formula:

LTCG = Final sale price – (Indexed cost of improvement + Indexed cost of acquisition + Transfer cost), where —

Indexed cost of improvement = Cost of improvement x CII of the year/Cost inflation for the year of improvement.

Indexed cost of acquisition = Cost of acquisition x CII of the year/CII of the acquisition year.

Let us understand this with an example.

Suppose Mr. Kohli bought a piece of land for Rs. 10 lakh in 2005. After 10 years, he sold that plot for Rs. 30 lakh.

Now, note that the Cost inflation index = Index for the financial year of transfer/index for the financial year of acquisition

Let’s assume that here the CII = 1030/490 = 2.10

Thus, indexed cost of purchase = CII x Purchase price = Rs. 10,00,000 x 2.10 = Rs. 21,00,000.

LTCG = Selling price – Indexed purchase cost = Rs. 30,00,000 – Rs. 21,00,000 = 9,00,000.

Tax on LTCG = 20% of 9,00,000 = Rs. 1,80,000.

Tips to Get Exemption from Paying Capital Gains Tax on Sale of Property

You can claim tax exemption in the case of capital gains arising from the sale of a property via various sections under the Income Tax Act. They are as follows: 

• You can claim tax exemption on LTCG earned through property sale under Section 54F of Income Tax Act. However, to be eligible for this exemption, you must utilise the entire profit to purchase a new house within two years or construct another home within three years. You can also avail this exemption if you had purchased a property one year before selling the current property.
• If you do not buy a new property, you can invest the gains in capital gains tax exemption bonds, also called 54EC bonds. Investment in these bonds will allow you to claim tax exemption on LTCG under Section 54EC of Income Tax Act. However, note that the maximum investment limit here is Rs. 50 lakh per FY.
• If you do not want to take either of these routes, you can deposit the amount in a Capital Gains Accounts Scheme (CGAS). You will find this in any public sector bank, in which you can keep the money for a period of 2-3 years. However, note that before the end of tenure, you will have to invest the sum towards the purchase of a new property. Otherwise, such gains will become subject to LTCG tax.

Also Read: Taxability Of Gratuity: Is Gratuity Taxable? Gratuity eligibility And Exemptions

Final Word

Proper tax planning is crucial for the maintenance of a healthy financial outlook. Thus, make sure that you know how to calculate capital gains tax on the sale of property so that you don’t have to go through last-minute hiccups. You must also remember the tax exemption tips to limit your tax outgo and aim for better savings.

Frequently Asked Questions

1. Under what circumstances can I claim an exemption under Section 54F?

LTCG tax exemption under Section 54F of Income Tax Act is applicable only to HUFs and individuals. The exemption will not be applicable if the taxpayer owns multiple properties on the date of transfer of the said property. 

2. Is TDS applicable on capital gain bonds?

Capital gain bonds are issued by NHAI and REC. TDS is not applicable to them. However, interest income from such bonds is taxable. The tenure for such bonds is set at 5 years. Note that you will not be able to withdraw your money before 5 years from the investment date. 

3. Can I carry my capital loss forward to reduce my tax liability?

Yes, if you have witnessed any capital loss previously, you can carry that forward and set it off against your capital gains. However, note that you can only carry forward such losses for a period of eight years. You also need to mention your capital losses in IT returns.

4. Is TDS applicable on the sale of a property?

If a property’s value is more than Rs. 50,00,000, then the buyer is liable to deduct TDS on the entire amount. As per Sec 194IA of Income Tax Act, the buyer must deduct tax at 1% or 0.75% (depending upon the payment date) at the time of making the payment. Furthermore, deductions should be credited to the government’s account by visiting any authorised bank branch.

5. What will happen if I skip the TDS payment on a property?

The penalty for skipping the TDS payment on a property could attract a penalty of up to Rs. 1 lakh under Section 271H. Note that you need to pay the tax amount to the government within 7 days from the transaction date.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.