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.

Purchase of agricultural land: Capital gains can be invested in the purchase of agricultural land, which is not considered as a “capital asset” under the Income Tax Act. However, the land must be situated in India, and the investment must be made within two years from the date of sale.

Investment in small saving schemes: Capital gains can be invested in small saving schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), or Post Office Time Deposit. These schemes offer tax-free returns and can be used to save tax on capital gains.

Investment in specified bonds: Capital gains can be invested in specified bonds like Rural Electrification Corporation (REC) and National Highways Authority of India (NHAI) bonds, which offer a fixed rate of interest and have a lock-in period of three years. The investment must be made within six months from the date of sale.

Investing in real estate investment trusts (REITs): Capital gains can be invested in REITs, which are trusts that own and manage income-generating real estate properties. Investing in REITs can provide diversification, regular income, and capital appreciation. The investment in REITs should be made within six months from the date of sale.

Investing in equity-linked savings schemes (ELSS): Capital gains can be invested in ELSS, which are mutual funds that invest in equities and offer tax benefits under Section 80C of the Income Tax Act. ELSS funds have a lock-in period of three years and can provide higher returns than traditional tax-saving instruments like PPF and NSC.

Donating to charitable organizations: Capital gains can be donated to charitable organizations that are approved by the Income Tax department, which can provide tax benefits under Section 80G of the Income Tax Act. The donation can be made in cash or kind, and the amount of tax benefit depends on the type of charitable organization and the amount donated, Contact Team IN Filings for Donation and 80G certificate here.

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. Legal Services
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FAQ about Capital Gain tax on property

what are capital gains

Capital gains refer to the profit that an individual or entity earns when they sell a capital asset, such as real estate, stocks, or bonds, for a price that is higher than their original purchase price.

what is long term capital gain

Long-term capital gain refers to the profit earned on the sale of a capital asset that has been held for more than 2 year. The tax on long-term capital gains is typically lower than that on short-term capital gains.

what is short term capital gain

Short-term capital gain refers to the profit earned on the sale of a capital asset that has been held for Less then 2 years or less. Short-term capital gains are typically taxed at a higher rate than long-term capital gains.

how to calculate capital gain

To calculate capital gain, subtract the purchase price of the asset from the selling price of the asset. The resulting figure is the capital gain. If the selling price is lower than the purchase price, the resulting figure is a capital loss. It’s important to include any relevant transaction costs, such as commissions, in the calculation. Additionally, the type of asset, holding period, and other factors may impact the calculation of capital gain.

how to save capital gain tax

To save long-term capital gains tax, consider reinvesting the proceeds into a similar asset within a specific time frame or investing in specified bonds under Section 54EC. Calculation of capital gain involves subtracting the purchase price from the selling price, while factoring in transaction costs and considering other relevant factors.

is basic exemption limit available for long term capital gain

No, the basic exemption limit available under income tax laws is not applicable to long-term capital gains. Long-term capital gains on the sale of assets such as property, stocks, or mutual funds are taxed separately under the Income Tax Act.

how is capital gains calculated on sale of property

Capital gains on the sale of property are calculated by subtracting the indexed cost of acquisition of the property from the sale price of the property. The indexed cost of acquisition is the purchase price of the property adjusted for inflation using the Cost Inflation Index (CII) provided by the Income Tax Department. Additionally, any expenses incurred in the sale of the property, such as brokerage fees, legal fees, or stamp duty charges, can be deducted from the sale price before calculating capital gains. The resulting figure is the capital gain, which is taxed as per the prevailing tax laws

how to avoid capital gains tax

Strategies to potentially avoid long-term capital gains tax include reinvesting the proceeds, investing in specified bonds, utilizing tax-loss harvesting, holding onto the asset for the long term, or gifting the asset to a family member. Consult with a tax professional for personalized advice.

how to buy capital gain bonds online

Capital gain bonds can be purchased online through the websites of authorized institutions that issue these bonds, such as the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). The process typically involves filling out an online application form, submitting necessary documents, and making the payment online. It is important to verify the authenticity of the institution and the website before making any purchases.

how to close capital gain account after 3 years

To close a capital gains account after 3 years, you will need to submit a written application to the bank or financial institution where the account is held, requesting closure of the account. You will also need to provide the necessary documents, such as the account opening form and proof of identity and address, to complete the closure process. Any remaining funds in the account will be disbursed to the account holder as per their instructions

how to fill long term capital gain in itr 2

To fill long-term capital gain (LTCG) in ITR-2, follow these steps: Under the “Income Details” tab, select “Schedule CG” to report capital gains. Enter details of the asset sold, including description, date of sale, sale price, and cost of acquisition. Calculate the LTCG by subtracting the indexed cost of acquisition from the sale price. Enter the calculated LTCG amount in the relevant column of the “Schedule CG” section. If eligible for any exemptions or deductions, enter those details in the applicable sections. Verify the information and save the form.

how to show capital gain in itr

Under the “Income Details” tab, select “Schedule CG” to report capital gains. Enter details of the asset sold, including description, date of sale, sale price, and cost of acquisition. Calculate the capital gain by subtracting the cost of acquisition from the sale price. If the asset was held for more than 2 year, it is considered long-term capital gain (LTCG). Enter the calculated LTCG amount in the relevant column of the “Schedule CG” section. If the asset was held for less than 2 year, it is considered short-term capital gain (STCG). Enter the calculated STCG amount in the relevant column of the “Schedule CG” section. If eligible for any exemptions or deductions, enter those details in the applicable sections. Verify the information and save the form.

can business loss be set off against capital gains

business losses can be set off against capital gains to reduce the taxable amount. The Income Tax Act allows for such set-offs, subject to certain conditions and limitations. For example, short-term capital gains (STCG) can be set off against any business loss, while long-term capital gains (LTCG) can only be set off against business income

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