Capital Gain on Sale of Property & Land

Capital gains tax on the sale of property and land is a significant component of real estate transactions in India. Whether you’re selling a residential home, a commercial property, or agricultural land, the profits derived from these sales are subject to capital gains tax. This article will explain capital gains, the types of capital gains on property, tax rates, and exemptions available to reduce your tax liability.

Budget 2024 Update

Budget 2024 introduces significant changes to asset classification for capital gains taxation, effective from 23 July 2024. The key amendments are as follows:

1. Simplified Holding Periods: The classification of assets into long-term and short-term now follows only two holding periods:
   • 12 months: Applies to all listed securities. Assets held for over 12 months will be classified as long-term.
   • 24 months: Applies to all other assets, including immovable property. Assets held beyond 24 months will be considered long-term. The earlier 36-month holding period has been eliminated.
2. Taxation on Short-Term Capital Gains: Short-term capital gains from the sale of immovable property will continue to be taxed at the individual’s applicable income tax slab rates.

Capital Gains on Sale of Property or Land

A taxpayer who sells an immovable property or land should report such income or loss as Capital Gains in the Income Tax Return and pay tax on it at the applicable rate. Capital Gain Tax on the sale of property or land is determined based on the nature of the capital gains i.e. long-term or short-term.

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 month now.

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 month now.

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 additions or improvements to the capital asset. The taxpayer can also calculate the Indexed Cost of Improvement using the CII.

Sale of land and building made from 23rd July 2024 will attract a tax rate of 12.5% without indexation benefit or a 20% tax rate with the indexation benefit at the option of taxpayer, if such property has been acquired before 23rd July, 2024. For sale of properties acquired on or after 23rd July, 2024, the tax rate will be 12.5% without indexation which are qualified as long term assets.

Calculation of Short-Term Capital Gain tax on the 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.

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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.

For example, 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 is completed, you want to sell the rights. So 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 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.
• 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.

How to report Income from the Sale of Immovable Property

• Due Date – 31st July of the Assessment Year
• ITR Form: The taxpayer should file ITR-2 (ITR for Capital Gains Income) on the Income Tax Website since income on the sale of immovable property such as land, building, or house property is Capital Gains. In ITR-2, the gains will be reported in Schedule CG.

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

To save STCG on the sale of immovable property, the taxpayer can set off Short Term Capital Loss from any other capital asset against it. Further, since STCG on the sale of immovable property is taxable at slab rates, the taxpayer can claim Chapter-VIA deductions too. Further, in the case of LTCG, the taxpayer can set off long-term and short-term losses from other capital assets. However, in the case of LTCG, the deductions under Chapter VIA can not be claimed.

The taxpayer can claim the following capital gain exemptions to save capital gain tax on the sale of residential property:

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

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

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

The taxpayer must hold the new asset for the specified period as per the relevant section. However, if they sell the asset before the specified time period, they must report it as income in the relevant financial year and pay tax at the applicable rate. The taxpayer has the option to open an account under the Capital Gains Account Scheme and park sale proceeds in it until they invest in a specified asset to claim the exemption.

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