Last Updated on Mar 15, 2022 by Sankeeth Sunny

Property is an important asset, which offers capital gains to the asset holders when they decide to sell it. Like the income tax you pay on your net income, capital gains tax is paid on your capital gains. Selling a property is a hefty task, and adding taxes on gains can make the process further cumbersome. 

Let us read in detail about the long-term capital gain tax on property sales in India and how you can save capital gains tax on the same.

This article covers:

Capital gains tax on the sale of land

Capital gain is the profit you earn by selling an asset, and the tax levied on the same is capital gains tax. This asset can be property (land or home), gold, and even bonds or stocks. 

Capital gains tax on the sale of land is exclusively levied on property, and your tax liability depends on your asset holding duration. STCG (Short-term capital gains) refers to the profit from a property held for 3 yrs or less. If you’ve held the property for over 3 yrs, then it is classified as LTCG (Long-term capital gains). 

The tax is charged as per the income tax slabs for short-term gains, but long-term capital gain on property is taxed at 20%. Apart from the 20% tax, a 3% cess is also levied on these real estate gains depending on specific terms and conditions.

Indexation technique

Before understanding capital gains tax computation, it is vital to know about the indexation technique. It is an economic regulation that adjusts the asset’s cost following the inflation index, which reduces your capital gains by increasing the property’s worth. Thus, this reduces your tax liability.

Calculation of long term capital gain on the property

The formula used for calculating long term capital gain on property is:

Long term capital gain

Sale consideration 

(–) Indexed cost of acquisition, indexed cost of the improvement (if any)

(–) Expenses incurred for the sale of the asset

(–) Exemption under Sections 54, 54F, 54EC if any availed

Here, 

Indexed cost of acquisition = Cost of acquisition x Cost Inflation Index (CII) of the year of sale 

The indexed cost of the improvement = Cost of improvement * Cost Inflation Index of the year in which improvement took place

If you’ve received property as a gift or inheritance, you’ll still have to bear a capital gains tax while selling it. In this case, the purchasing cost is taken to be the cost borne by the previous owner and will be indexed to their purchase year.

Things to remember regarding long/short term capital gains

  • You may be required to pay advance tax on capital gains arising from a property sale, irrespective of it being long-term or short-term capital gains.  
  • In case of a loss that cannot be offset against capital gains in a particular year, it may be carried forward for 8 yrs and can be set off in the future. 
  • If short-term capital losses arise on property sale, the same can be offset against long and short-term capital gains in the particular year. But, if the loss is long-term, it may be offset only against long-term capital gains and not short-term gain.  

Note: The transaction value in real estate is extremely high. As a result, the taxes on the same are also very high. It may be cumbersome to watch out for various nuances on taxes, especially the long-term taxes that come with the sale of any property.  The legal formalities and paperwork could be very complicated to deal with. And hence having appropriate knowledge of all aspects of short and long-term capital gain tax on property sales is paramount. Not having all records may truly become put you in a very uncomfortable position. So, make sure you are abreast with all the last updates and have all your paperwork sorted. 

Saving long-term capital gain tax on the sale of property in India

Much like income tax is subjected to certain exemptions, long-term capital gain tax on the sale of property in India is also liable to numerous exemptions. These are available for individuals and HUF (Hindu Undivided Families) if:

  • The capital gains are utilised for buying or constructing another house (available under Section 54).
  • The new house is built within a span of 3 yrs from selling the old one or constructed within 3 yrs.
  • In case the new house costs less than your sale amount, then the exemption is applicable in similar proportions.
  • The capital gains are used as investments in bonds (Section 54EC). This investment must be made within 6 mth of selling your property.

TDS on gains

TDS (tax deducted at source) is applicable for short-term or long-term capital gains. This deduction will be made by the buyer when making the payment. Only after the deduction is the balance paid to the seller. 

If the seller is an NRI, 1% TDS is applicable if the property value exceeds Rs 50 lakh. For non-NRIs, the TDS is 20%, irrespective of the property value.

What is a capital gains account scheme?

At times, constructing a new apartment immediately after selling the older one is not possible. Then the remedy is to deposit your capital gains under the Capital Gains Account Scheme (CGAS) in any public bank. The benefit of such a deposit is that you get additional 3 yrs to begin your house construction before your capital gains are taxed. You can opt for either of the two accounts available under CGAS, the Type-A (or Savings accounts) or Type-B (or term deposit accounts).

Conclusion

The sale of any capital asset will trigger a short-term or long-term tax, based on your holding period. When dealing with real estate, the entire taxation process, legal formalities, and paperwork management can get very complex. Knowing the details of long-term capital gain tax on property sales (in India) can help get a clear picture of one’s tax liabilities. So consult your tax advisor before addressing taxes on the sale of a property.

Aradhana Gotur

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