Capital Gains Tax on Sale of Property

Understanding Capital Gains Tax on Residential Property Sales

When you sell a residential property, any profit you make on the sale is called capital gain. This profit is taxed as per the Income Tax Act, under the head of “Capital Gains.” The tax rate depends on whether it’s a short-term (sold within 2 years) or long-term capital gain (sold after 2 years) and your tax bracket.

Long Term Capital Gain Tax Rate

The long-term capital gains tax rate on the sale of a residential property is 20%, with indexation benefit

Example of Capital Gain Tax

Suppose Rahul purchased a residential property in 2010 for Rs. 50 lakhs and sells it in 2023 for Rs. 1 crore. The cost inflation index for 2010-11 was 711, and for 2022-23, it was 1225.

To calculate the indexed cost of acquisition, we would use the following formula:

Indexed Cost of Acquisition = Actual Cost of Acquisition x (Cost Inflation Index in the year of sale / Cost Inflation Index in a year of purchase)

So, the indexed cost of acquisition for Rahul’s property would be:

Rs. 50 lakhs x (1225/711) = Rs. 85.16 lakhs

To calculate the long-term capital gains, we would subtract the indexed cost of acquisition from the sale price:

Long-Term Capital Gains = Sale Price – Indexed Cost of Acquisition

Rs. 1 crore – Rs. 85.16 lakhs = Rs. 14.84 lakhs

Finally, the tax payable on the long-term capital gains would be 20% of Rs. 14.84 lakhs, which is Rs. 2.96 lakhs.

Exemption from Capital gain tax

To claim this exemption, you need to purchase another house within a period of one year before or two years after the date of transfer of the old house, or construct another house within three years from the date of transfer. If you don’t invest the capital gain amount in a new property before the due date of filing of the tax return, you can deposit the amount in a Capital Gains Deposit Account Scheme (CGDAS) in a public sector bank, and withdraw it later for the purchase or construction of the new house

Apart from this, there are other planning options available to minimize your capital gain tax liability. For instance, you can gift the property to a family member or transfer it to a trust, or sell it to a family member for a lower price than the market value.

Tax Planning from Capital Gain

• Section 54 provides an exemption from long-term capital gains tax arising from the sale of a residential house property.
• The exemption is available if the capital gains are invested in another residential house property in India
• The exemption is available only for long-term capital gains, which are gains arising from the sale of a property that was held for more than two years.
• The exemption is available for the transfer of one residential house property only.
• The amount of exemption is limited to the amount invested in the new residential house property.
• The new residential house property must be purchased within two years of the sale of the original property or one year before the sale of the original property.
• The new residential house property must be located in India.
• The taxpayer can exercise an option to invest the capital gains in two residential house properties in India, but only once in a lifetime, provided the amount of long-term capital gain does not exceed Rs. 2 crores.
• If the new residential house property is sold within three years from the date of its purchase, the exemption claimed under Section 54 will be revoked, and the capital gains that were earlier exempted will become taxable.
• The exemption under Section 54 can be a valuable tool for taxpayers looking to sell a residential house property and reinvest the proceeds in another property. It is important to meet all the requirements of the section to claim the exemption successfully.
• Regarding sale of different house and invested on new house, if you have already claimed the exemption under Section 54 in the past and have invested in a new residential house property, you can claim the exemption again if you have sold a different residential house property and invested in a new one within the specified time limits and other conditions mentioned above.
• The Capital Gains Deposit Account Scheme (CGDAS) is an option available to taxpayers who wish to claim an exemption under Section 54, but have not yet utilized the capital gains arising from the sale of their old house to purchase or construct a new residential property.

Capital Gain Account Scheme:

• The taxpayer must deposit the unutilized amount of capital gains from the sale of the old house in any branch of a public sector bank under the Capital Gains Deposit Accounts Scheme, 1988. Before filing ITR
• The amount deposited must be used to purchase or construct a new residential property within the specified time limit of 2 years or 3 years (as the case may be).
• The specified time limit for purchasing a new residential property is one year before or two years after the date of transfer of the old house.
• The specified time limit for constructing a new residential property is three years from the date of transfer of the old house.
• The taxpayer can withdraw the amount from the CGDAS account to purchase or construct the new residential property.
• The interest earned on the deposit will be taxable in the hands of the taxpayer.

The amount deposited under the CGDAS account can be utilized only for the purpose of purchasing or constructing a new residential property, failing which the deposited amount will be taxable in the year of the expiry of the specified time limit.

Other Tax planning under Capital gain

Invest in bonds: Another option available to taxpayers is to invest in specified bonds under Section 54EC of the Income Tax Act. This can help in reducing the tax liability on the capital gains by claiming a deduction of up to Rs. 50 lakhs in a financial year.

• Pre-sale renovation: If the property requires renovation or repair work, taxpayers can consider carrying out the work before the sale of the property. The expenses incurred on renovation can be claimed as a deduction from the sale value of the property, thereby reducing the capital gains.
• Cost inflation index: Taxpayers can use the cost inflation index (CII) to adjust the purchase cost of the property for inflation. The CII is a measure of inflation and is used to calculate the indexed cost of acquisition of the property. By using the CII, taxpayers can reduce the capital gains and thereby the tax liability.
• Joint ownership: Taxpayers can consider transferring the ownership of the property to their spouse or other family members to reduce the tax liability. By doing so, they can utilize the basic exemption limit of each individual.
• Investing in startups: Taxpayers can consider investing in eligible startups to claim a deduction under Section 54GB of the Income Tax Act. The deduction is available for investments made in eligible startups up to an amount of Rs. 50 lakhs, subject to certain conditions.
• Investing in land: Taxpayers can consider investing in land to reduce the tax liability on capital gains. The investment in land can be made within a period of two years from the date of sale of the property, and the land must be used for residential purposes.

·  Invest in eligible tax-saving instruments: Taxpayers can invest in eligible tax-saving instruments such as Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Pension System (NPS), etc., to claim deductions under Section 80C of the Income Tax Act, 1961. This can help in reducing the taxable income and thereby reducing the tax liability on the capital gains.

·  Splitting the sale: If the taxpayer is selling a property with a significant capital gain, they can consider splitting the sale over two financial years to reduce the tax liability. By doing this, they can utilize the basic exemption limit of Rs. 2.5 lakhs in each financial year, thereby reducing the tax liability.

·  Joint ownership: If the taxpayer is selling a jointly owned property, they can consider transferring the ownership to the spouse or other family members to reduce the tax liability. This can help in reducing the tax liability by utilizing the basic exemption limit of each individual.

Expert Tax Advice from Prakasha & Co for Property Sales & Capital Gains.

In conclusion, selling a residential property can involve various tax implications, including capital gains tax and TDS. It is crucial to have a proper understanding of the tax laws and regulations before proceeding with the sale. Prakasha & Co is a leading tax advisor that provides expert advice and assistance to clients in managing their tax liabilities and planning for the long-term tax implications. With their expertise and knowledge, they help clients to get the best tax plan and ensure compliance with legal requirements. Contact Prakasha & Co for reliable and effective tax solutions.

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