Capital Gains Tax on sale of Property :Capital Gains Tax is the tax you pay on the profit earned from selling a property. This profit is called a “capital gain”, and it arises when the selling price of the property is higher than its purchase price.
The sale of a property can results in capital gains, which are subject to tax. The tax implications on sale of property is dependent upon two factors namely the holding period and type of property. Here’s a detailed guide to help you understand the tax implications:
Holding period of property and Types of Capital Gains
- If the property is held for more than 24 months the capital gain arising on such sale of property will be termed as Long Term in nature – LTCG
- If the property is held for 24 months or less the capital gain arising on such sale of property will be termed as Short Term in nature – STCG
Calculation of Capital Gains Tax
Capital Gain is the difference between the sale price and the cost of acquisition (or indexed cost)
LTCG = Sale Price – Indexed Cost of acquisition
STCG = Sale Price – Cost of acquisition
Notes –
1. Sale Price means the price at which the property is sold
2. Cost of Acquisition means the original purchase price of the property
3. Indexed Cost is the cost of acquisition adjusted for inflation (specifically applies for LTCG with indexation benefits). Indexed cost is the amount calculated based on the CII index.
Capital Gain Tax Rates on Profit made on sale of house property
1. LTCG
For Transfers before July 23, 2024
- Taxed at 10% above without indexation benefits
- Taxed at 20% with indexation benefits
For transfers after July 23, 2024
- Taxed at 12.5% without indexation benefits
- Taxed at 20% with indexation benefits
NOTE ON LTCG – For sale of land/building after July 23, 2024 (original acquisition date of property is before 22.07.2024) – Tax can be paid by opting either (a) or (b)
2. STCG
Taxed as ordinary income, with rates varying based on the taxpayer’s income slab.
Loss on Sale of House Property
If you’ve sold a house property at a loss, then there is no capital gain tax payable, in fact you can carry forward the loss to set it off against future income from house property or capital gains.
To allow carry forward of losses, the return must be filed within the due date specified under Section 139(1). The loss can be carried forward for up to 8 assessment years.
Exemptions and Deductions allowed
1.Section 54
A. Investing in another Residential Property
If you invest the sale proceeds in another residential property within a specified period (1 year before or 2 years after the sale date), you can claim exemption under section 54.
Conditions: The exemption is available only if you own one residential property (excluding the one sold).
B. Constructing a new residential house property Exemption
If you’ve sold a residential house property and invested in constructing a new residential house property within a specified period, then exemption can be claimed under section 54.
Conditions: The new house property must be constructed within 3 years from the sale date. The exemption is available up to the amount invested in the new house property.
2. Section 54EC – Invest in Specified Bonds
If you invest the sale proceeds in specified bonds (like NHAI or REC bonds) within a specified period (6 months from the sale date), you can claim exemption under Section 54EC.
Conditions: The exemption is limited to ₹50 lakh.
How to save Capital Gains Tax on Property Sale
1. Hold the property for more than 24 months to qualify for LTCG and potentially lower tax rates.
2. Invest in a new property to claim exemption under Section 54 or 54F.
3. Consider tax implications when selling a property to minimize tax liability.
Important Considerations
1. Maintain accurate records of the sale, including the sale deed, purchase deed, and other relevant documents.
2. Seek professional advice to ensure compliance with tax laws and to optimize tax planning strategies.
3. Report the capital gains in the Income tax returns.
4. Pay the tax on capital gains within specified due dates.
FAQ’s :
1. Do I need to pay advance tax on capital gains?
Yes. If you have significant capital gains, you may be liable to pay advance tax in installments during the financial year to avoid interest penalties.
2. Is TDS applicable on sale of property?
Yes, the buyer must deduct 1% TDS if the sale value exceeds ₹50 lakh. The seller must provide PAN to avoid higher TDS.
3. Can NRIs claim exemptions on capital gains tax?
Yes, NRIs can also claim exemptions under Sections 54 and 54EC, but TDS is generally higher for NRIs unless lower deduction is obtained via a certificate.
4. What are some common mistakes people make while filing capital gains?
1.Not reinvesting within the deadline
2.Ignoring indexation benefit
3.Failing to report full sale consideration
4.Missing deductions under relevant sections
Summary
By understanding the tax implications of capital gains on the sale of property, you can make informed decisions and minimize your tax liability. By exploring the tax planning strategies, tax liability can be minimized and you can make the most of your sale proceeds.
