What is the capital gain tax on the sale of property in India? How to calculate long-term and short-term capital gains and what is the applicable tax rate? A complete guide on property tax.
All of us one day or another day either buy or sell the property. In such a scenario understanding the capital gain tax on the sale of property in India is the most important aspect.
One of my blog readers repeatedly requested this topic. Hence, thought to write a detailed post on capital gain tax on the sale of property in India.
Capital Gain Tax on Sale Of Property in India
You have to understand first the definition of a capital asset, what is chargeable, and the types of asset classes.
What is Capital Asset?
A capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Property of any kind, held by the assessee is a capital asset. But excluding the assets like stock-in-trade (consumable stores, or raw materials held for the purpose of business or profession), rural agricultural land, Gold bonds, and movable personal goods like cars, mobiles, clothes, furniture, Jewelry, paintings, drawings, etc.
When the capital gain is chargeable?
There are certain conditions to charge the capital gain and they are as below.
# There should be a capital asset.
# The capital asset is transferred by the assessee (Sale, transfer of ownership). However, the transfer is considered in case of distribution of assets under HUF, gift, WILL, or irrevocable trust.
# Such a transfer takes place during the previous year. The meaning of transfer for property transfer is until the conveyance deed is executed and registered. However, even if the conveyance deed is not registered, then still it is considered a transfer happened if the below conditions are met as per Sec.53A of the property act – there should be a contract in writing, the transferee has paid the consideration or is willing to perform his part of the contract and the transferee should have taken possession of the property.
# Any gain or profit arises as a result of the transfer.
# Such profit or gain is not exempt from tax under Sec.54, 54B, 54D, 54EC, 54EE, 54F, 54G, 54GA, and 54GB.
Types of Capital Assets
There are two types of capital assets. One is Long Term Capital Asset and another is Short Term Capital Asset.
If your holding period is less than two years (less than 24 months), then it is called a short-term capital asset. – Taxed as per your tax slab.
If your holding period is more than two years (more than 24 months), then it is called a long-term capital asset. – Taxed @ 20% with indexation benefit.
Computation of Capital Gains (Section 48)
Let us first try to understand how short-term capital gain is calculated.
Short Term Capital Gain = Full Value of Consideration – Cost of acquisition – Cost of Improvement (if any) – Expenditure incurred in connection with such transfer
Long Term Capital Gain = Full Value of Consideration – Indexed cost of acquisition – Indexed cost of the improvement (if any) – Expenditure incurred in connection with such transfer
Here, you have to understand few important aspects.
Full Value Of Consideration –
Full value of the consideration is the consideration received or receivable by the transferors in lieu of the assets, which he has transferred. Such consideration may be received in cash or in kind. If it is received in kind, then the fair market value of such assets is taken as the full value of consideration.
The full value of consideration does not mean the market value of that asset that is transferred.
It makes no difference whether (or not) the full value of consideration is received during the previous year. Even if the full value of consideration is received in installments in different years, the entire value of consideration has to be taken into account for computing the capital gains, which become chargeable in the year of transfer.
Cost Of Acquisition –
Cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of a capital nature for completing or acquiring the title to the property are includible in the cost of acquisition. Interest on money borrowed to purchase an asset is part of the actual cost of the asset.
Do remember that interest paid towards a home loan is also considered the cost of acquisition. However, interest paid to the provident fund (EPF) if you have taken any loan is not considered an expenditure.
Expenses relating to advocate fees and brokerages in relation to purchasing of property shall be included in the cost of acquisition.
If a person has acquired a capital asset in the circumstances specified as below, then to calculate capital gain at the time of transfer of such asset cost to the previous owner is taken as the cost of acquisition. This rule is always applicable and does not have any exceptions. Circumstances specified by section 49(1) are as follows–
(a) acquisition of property on any distribution of assets on the total or partial partition of a Hindu undivided family;
(b) acquisition of property under a gift or will;
(c) acquisition of property—
i. by succession, inheritance or devolution, or
ii. on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons where such dissolution had taken place before April 1, 1987, or
iii. on any distribution of assets on the liquidation of a company, or
iv. under a transfer to a revocable or an irrevocable trust, or
v. by a wholly-owned Indian subsidiary company from its holding company, or
vi. by an Indian holding company from its wholly-owned subsidiary company, or
vii. under a scheme of amalgamation, or
viii. under a scheme of demerger; or
ix. under a scheme of conversion of private company/unlisted company into LLP; or
x. on any transfer in the case of conversion of firm/sole-proprietary concern into company; or
xi. on any transfer, in relocation, of a capital asset by the original fund to the resulting fund which comes under section 47(viiac)/(viiad); or
xii. on any transfer which comes under section 47(viiae)/(viiaf); or
(d) acquisition of property, by a Hindu undivided family where one of its members has converted his self-acquired property into joint family property after December 31, 1969.
If a capital asset was acquired in any one of the modes given above, then cost to the previous owner shall be taken as “cost of acquisition” for the purpose of calculating capital gain at the time of its transfer. There is no option in this regard.
Where the previous owner has acquired the property in an aforesaid manner, the previous owner of the property means the last previous owner who had acquired the property by means other than those discussed above. Cost of any improvement of the asset borne by the previous owner, or the assessee, will be added to such cost.
Cost of acquisition of the property should be fair market value as of 1st April 2001. However, in the following cases, the assessee may take at his option, either the actual cost or the fair market value of the asset as on April 1, 2001, as cost of acquisition :
- where the capital asset became the property of the assessee before April 1, 2001; or
- where the capital asset became the property of the assessee by any mode referred to in section 49(1) and the capital asset became the property of the previous owner before April 1, 2001.
Indexed cost of Acquisition –
The formula is as below.
Indexed Cost of Acquisition=(Cost of Acquisition/Cost of Inflation Index (CII) for the year in which the asset was first held by the assessee OR FY 2001-02, whichever is later)* Cost of the Inflation Index (CII) for the year in which the asset was sold or transferred.
Let us assume that you purchased the property in FY 2005-06 at Rs.50 lakh and sold the same in FY 2017-18 at Rs.1.5 Cr. Now the indexed cost of acquisition will be as per the above formula i.e.
Indexed Cost of Acquisition=(Rs.50 lakh/117)*272=Rs.1,16,23,931. So the Long Term Capital Gain=Selling Price-Indexed Cost of buying property=Rs.33,76,069.
(Note-As per the below Cost of Inflation Index (CII), the CII rate for FY 2017-18 is 272 and for FY 2005-06, it is 117).
However, if you do not consider the indexed cost, then in plain the gain may be said as Rs.1 Cr lakh (Rs.1.5 Cr-Rs.50 Lakh). But in the case of taxation, the LTCG on capital assets will be after adjusting the cost of buying to inflation or the Cost of Inflation Index (CII).
If the property was acquired as mentioned above under Section49(1) like will or gift, then the formula is as below.
Refer the latest CII rate at “Cost of Inflation Index from FY 2001-02 to FY 2022-23“.
Indexed Cost of Acquisition=(Cost of Acquisition/Cost of Inflation Index (CII) for the year in which the asset was first held by the previous owner OR FY 2001-02, whichever is later)* Cost of the Inflation Index (CII) for the year in which the asset was sold or transferred.
Cost of Improvement –
Cost of improvement is capital expenditure incurred by an assessee in making any additions/improvements to the capital asset. It also includes any expenditure incurred to protect or complete the title to the capital assets or to cure such title. Any expenditure incurred to increase the value of the capital asset is treated as cost of the improvement.
Few points to note here is –
# Expenditure incurred before 1st April 2001 is not considered.
# Double deduction of the same cost under different heads is not permitted.
# Betterment charges if anything is paid are also part of this.
Indexed Cost of Improvement –
Indexed cost of improvement for the LTCG calculation is arrived by using the below formula.
Cost of improvement * (CII for the year in which the last asset is transferred/CII for the year in which improvement took place).
Important points to consider while buying or selling property in India
# There is a restriction on taking cash on the sale of immovable property. If any person takes cash of Rs. 20,000/- or more on the sale of immovable property as an advance or as a sale consideration, then a penalty equal to cash accepted on sale shall be levied.
# If any person purchases or sells immovable property whose Stamp Duty Value is Rs.30 lakhs or more, then it will be considered a High-Value Transaction, and the Registrar is required to report to Income-tax Department about such transaction. The same is shown in Form No. 26AS of the taxpayer. Income tax then verifies the return of income and whether adequate capital gains have been disclosed or not in ITR.
# If any person sells the immovable property for Rs.50 lakhs or more, then he will receive sale consideration after the deduction of TDS@1%. As per law buyer is required to deduct TDS and then pay the balance amount of the seller. The seller can claim TDS while filing his return of income. TDS is not deducted on the sale of agricultural land.
# Taxpayers can now obtain long-term capital gains exemption on the sale of a house by investing in two houses where capital gains is less than 2 Crore rupees. Earlier, the exemption was available for investment in only one property.
Conclusion – It is a wide topic and taxation mainly depends on case to case. However, I tried my best to cover the topic in a simple way. Let me know if you have any questions.
Allotted a builder floor in 2009, paid 80% cost in installments till 2019, balance 20% payment & possession given by builder in 2021. I have Sold the floor in 2022. Can i claim index/bank interst on installments paid to builder in 10 years to calculate acquisition cost ?
Hi Sir, thanks for this post.
There is no consensus among the CA community considering the home loan interest as cost of acquisition if someone claims tax deduction u/s 24.
And Can we claim exemption u/s 54 if we utilize the capital gain proceeds for the construction of a farm house?
I agree that there is no consensus. However, I wrote based on whatever I read and referred. Regarding the claim exemption u/s54, the capital gain proceeds to be invested in residential property but not a farmhouse.
1. Your list of exclusion of capital assets includes jewelry and paintings also. In my opinion, these two assets also form a capital asset.
2. Different treatment of shares & securities including debt/NCD papers and Debt mutual fund should have been included in the write-up. And if you plan to take up these issues in the subsequent blogs, then, at least, an overall architecture of taxation of capital assets should have been mentioned with a tag that these issues would be covered in the subsequent blogs.
Regarding including the jewelry, it is the definition that I shared. Yes, the idea of this post is about property only. Other asset classes are not included for this post intention.
Thanks for posting my long request on capital gains. Can you please add capital gains account i.e sb account and fd account to avoid capital gains tax and lock in period for these accounts. Also clarify whether we can sell lqnd and invest in house or flat OR do we need to invest only in another land, may be two sites. Regards sridhar
That part I will cover in a different post. If I combine them all in one post, then it turns big and confusing for readers.