Capital Gain Tax on Sale of Property/Land

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Sakshi Shah

Capital Gains
Income Tax
Indexation
Sale of Property
Section 112
Slab Rates
Last updated on July 1st, 2022

Immovable Property or Land is considered to be a Capital Asset as per the Income Tax Act. A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains it in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on sale of property or land is determined on the basis of the nature of the capital gain. long term or short term. While the STCG on sale of immovable property is taxable at slab rates, the LTCG on sale of immovable property is taxable at 20% with indexation benefit under Section 112 of Income Tax Act.

Capital Gain Tax on Sale of Property / Land

Capital Gain can be of two types depending on the period of holding of the capital asset.

  1. Long Term Capital Gain (LTCG): If the taxpayer sells an immovable property or land held for more than 24 months, gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
  2. Short Term Capital Gain (STCG): If the taxpayer sells an immovable property or land held for up to 24 months, gain or loss on such sale is a Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL).
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.
Tip
The holding period for immovable property i.e. land, building and house property was 36 months up to FY 2016-17. However, the period of holding is reduced to 24 months FY 2017-18 onwards.

Income Tax on Sale of Immovable Property

Income Tax on the sale of immovable property i.e. land, building, or house property is similar to the tax treatment of other capital assets.

Calculation of Long Term Capital Gain tax on sale of property in India

As per Section 112 of the Income Tax Act, LTCG on the sale of immovable property in India is taxable at 20% with an indexation benefit. To take the indexation benefit, the taxpayer can calculate the indexed cost of the acquisition using Cost Inflation Index i.e. CII to compute the long term capital gain. The cost of Improvement is the expense incurred by the taxpayer for making addition or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement using the CII.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Indexed Cost of Acquisition (XXXX)
Less Indexed Cost of Improvement (XXXX)
Less Exemption u/s 54 to 54GB (XXXX)
  Long Term Capital Gain XXXX

Calculation of Short Term Capital Gain tax on sale of property in India

The Short Term Capital Gain on the sale of immovable property is taxable as per the slab rates. There is no indexation benefit in the case of a Short Term Capital Gain. Further, the capital gain exemption under Section 54 to 54GB is also not available. Thus, the Capital Gain is calculated on the basis of the cost of acquisition, cost of improvement, and transfer expenses.

  Particulars Amount
  Sale Consideration XXXX
Less Transfer Expenses (XXXX)
Less Cost of Acquisition (XXXX)
Less Cost of Improvement (XXXX)
  Short Term Capital Gain XXXX

Capital Gains on Sale of Property before Possession

Many times the taxpayer will sell the immovable property before receiving the possession of the same. Let’s understand the treatment of capital gains in that situation.

You have booked a property that is still under construction. So essentially you have acquired the rights for the under-construction property and not the property itself. Now before the construction completes, you want to sell the rights. Now the first question that comes to your mind is how do I calculate the capital gains for the same and what would be my tax liability?

Example

Darshil paid INR 20 Lakh on 01/01/2012 to book a house in a housing scheme. The scheme will give possession of the property on 01/01/2016. Darshil finds a better scheme and wants to sell the rights in this scheme. The taxability of the capital gains will depend on the time gap between the date of booking of the property and the date of agreement to transfer the rights in the under-construction property.

Various Situations

  1. If Darshil transfers the rights before 01/01/2015
    • Then it will result in short term capital gains since the holding period is less than 36 months.
    • Indexation benefit is not applicable
    • The capital gains will be taxable at the normal slab rate applicable to the individuals.
    • Since it will be short term capital gains, no capital gain exemption is available to save the capital gains tax on property.
  2. If Darshil transfers the rights after 01/01/2015
    • Then it will result in long term capital gains since the holding period is more than 36 months
    • Indexation benefit is applicable to the amount payable to the builder, stamp duty, and also registration fees.
    • The capital gains will be taxable at 20%
    • Since it will be long term capital gains, the exemption under Section 54F and Section 54EC will be available.
    • You can not claim the exemption under Section 54 because the exemption is for the purchase of new residential property against the sale of existing residential property. Here what you are selling is a right to acquire a residential house and not the residential house itself. Many people treat the sale of an under-construction property at par with a residential house for the purpose of claiming long term capital gain exemption which is incorrect and the taxpayer may receive a scrutiny notice.

Set Off & Carry Forward Loss on Sale of Immovable Property

ITR Form & Due Date for Income from Sale of Immovable Property

How to save capital gains tax on sale of immovable property?

To save STCG on sale of immovable property, the taxpayer can set off Short Term Capital Loss from any other capital asset against it. Further, since STCG on sale of immovable property is taxable at slab rates, the taxpayer can claim Chapter-VIA deductions too.

To save LTCG on the sale of immovable property, the taxpayer can set off Short Term Capital Loss or Long Term Capital Loss from any other capital asset against such LTCG. Further, since LTCG on sale of immovable property is taxable at a special rate of 20%, the taxpayer cannot claim Chapter-VIA deductions against it. Taxpayer can claim following capital gain exemptions to save capital gain tax on sale of residential property:

Further, taxpayer can claim following capital gain exemptions to save capital gain tax on sale of immovable property:

A taxpayer can claim the exemption by reinvesting the sale proceeds into a specified capital asset to lower the capital gains and save taxes. The taxpayer must hold the new asset for the specified period as per relevant section. However, if he/she sells the asset before specified time period, they must report it as income in the relevant financial year and pay tax at applicable rate. The taxpayer has an option to open an account under Capital Gains Account Scheme and park sale proceeds in it until they invest in specified asset to claim the exemption.

Capital Gain Tax on Sale of Inherited Property

When a taxpayer receives a property as inheritance, it is not taxable for the receiver. However, when the taxpayer sells such property, it is taxable as Capital Gains. Below are the steps to calculate Capital Gains tax on sale of inherited property:

The taxpayer must note the following for calculating Capital Gains:

FAQs

How do you calculate long term capital gains on the sale of immovable property?

Income from sale of immovable property after 24 months of purchase is a Long Term Capital Gain taxable at 20% with benefit of indexation. In case of LTCG, the taxpayer should calculate Indexed Cost of Acquisition using Cost Inflation Index (CII) issued by income tax department to compute the LTCG.
LTCG = Sale Consideration – Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

How can I save capital gains tax on the sale of immovable property?

You can claim capital gain exemption on investment in a specified asset and on fulfilling the specified sections. To save tax on Long Term Capital Gains from the sale of immovable property, the taxpayer can claim an exemption under Section 54, Section 54EC, Section 54EE, or Section 54GB of the Income Tax Act. These exemptions are not available for Short Term Capital Gains.

How to calculate tax on sale of inherited property?

The property received as inheritance is not taxable in the hands of the receiver at the time of inheritance. However, when the taxpayer sells the inherited property, it is taxable as capital gains. To calculate the capital gain, cost of acquisition is taken as cost to previous owner. The period of holding is calculated from the date of purchase of the previous owner.

Got Questions? Ask Away!

  1. Hey Manav,

    You can claim the lower of the following amount as a deduction u/s 54:

    • Amount invested in the new house property
    • Capital gains

    If the purchase of the new house property is:

    • Purchased within 2 years of the date of sale
    • Constructed within 3 years of the date of sale

    Provided the following conditions are fulfilled:

    • You cannot sell the new house property for 3 years from the date of purchase
    • If not able to buy new house property before filing the Income Tax Return, you can deposit the amount in Capital Gains Deposit Accounts Scheme to claim the exemption
  2. Hi @ashu

    In the case of co-owners of house property who are also co-borrowers of a home loan, each one of them can claim a deduction on interest on the loan limited to Rs. 2 Lakh each.

    Each of them can also claim the deduction on principal repayments, stamp duty as well as registration charges under Section 80C with the overall limit of Rs.1.5 Lakh. The ratio of the deduction of each benefit will be in the same as the share of ownership in the property.

    You can read more about it here - Income from House Property and Taxes - Guide - Learn by Quicko

  3. Yes. Both the co-owners can claim the deduction for principal and interest even if one of them is not paying the EMI.

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