Capital Gain Tax on Sale of Property/Land

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.

• Sale Consideration = In the case of immovable property, as per Section 50C of Income Tax Act, sale consideration should be the sale value of capital asset or value adopted by stamp duty valuation authority whichever is higher.
• Transfer Expenses = expenses incurred exclusively for the sale of the capital asset.
• Indexed Cost of Acquisition = Cost of Acquisition * (CII of year of Sale / CII of year of Purchase)
• Indexed Cost of Improvement = Cost of Improvement * (CII of year of Sale / CII of year of Improvement)
• Capital Gain Exemption – Taxpayer can claim capital gain exemption under Section 54 to 54GB on fulfilling the specified conditions.

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.

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

• The loss on sale of an immovable property held for more than 24 months is a Long Term Capital Loss. As per the income tax rules for set off and carry forward of losses, the taxpayer can set off Long Term Capital Loss (LTCL) against Long Term Capital Gain (LTCG) only. They can carry forward the remaining loss for 8 years and set off against LTCG only.
• The loss on sale of an immovable property held for up to 24 months is a Short Term Capital Loss. The taxpayer can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). They can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.

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

• ITR Form: The taxpayer should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains.
• Due Date – 31st July of the Assessment Year
  • Up to FY 2019-20 – 31st July
    31st July – for taxpayers to whom Tax Audit is not applicable
    30th September – for taxpayers to whom Tax Audit is applicable
  • FY 2020-21 Onwards
    31st July – for taxpayers to whom Tax Audit is not applicable
    31st October – for taxpayers to whom Tax Audit is applicable
• Tax Audit: Since the income on the sale of unlisted stock is a Capital Gains Income, the applicability of tax audit under Section 44AB need not be determined.

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:

• Section 54F – Exemption on sale of residential house property on investment in another residential house property.
• Section 54GB – Exemption on sale of residential house property on investment in equity shares of an eligible company.

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

• Section 54EC – Exemption on sale of land or building on investment in NHAI/REC bonds.
• Section 54EE – Exemption on sale of any long-term capital asset on investment in units of a specified fund.

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:

• STCG = Sale Consideration – Transfer Expenses – Cost of Acquisition – Cost of Improvement
• LTCG = Sale Consideration – Transfer Expenses – Indexed Cost of Acquisition – Indexed Cost of Improvement

The taxpayer must note the following for calculating Capital Gains:

• Period of Holding to determine STCG or LTCG would be from the date of purchase by the previous owner
• Cost of Acquisition would be the cost of the previous owner
• Indexed Cost of Acquisition would be computed based on the year of acquisition of the previous owner

FAQs