Important Keyword: Capital Gains, Income Tax, Indexation, Sale of Property, Section 112, Slab Rates.

Capital Gains on Sale of Property & Land

In the realm of personal finance, individuals often amass various assets over time, ranging from real estate properties to stocks, jewelry, and more. These assets, collectively known as capital assets, are typically acquired with the hope of appreciating in value over time. However, it’s important to recognize that when individuals decide to part ways with these assets by selling or transferring them, they become subject to taxation on any gains realized from the transaction.

Capturing the essence of wealth management, this understanding of capital gains taxation underscores the financial responsibilities individuals face when navigating their asset portfolio. Through prudent financial planning and awareness of tax implications, individuals can effectively manage their investments while optimizing their financial outcomes.

Capital Gain on Sale of Property or Land

When an individual decides to sell an immovable property or land, it becomes essential to report the resulting income or loss as Capital Gains in their Income Tax Return. This step is crucial as it determines the tax liability that the individual must fulfill based on the applicable rate.

Capital Gain can manifest in two forms, each dependent on the duration of ownership of the capital asset:

Long-Term Capital Gain (LTCG): If the individual sells an immovable property or land that they have held for more than 24 months, any profit or loss arising from the transaction is classified as Long-Term Capital Gain (LTCG) or Long-Term Capital Loss (LTCL).

Short-Term Capital Gain (STCG): Conversely, if the individual sells an immovable property or land that they have held for up to 24 months, any profit or loss incurred is categorized as Short-Term Capital Gain (STCG) or Short-Term Capital Loss (STCL).

Income Tax on Sale of Immovable Property

The tax treatment of income derived from the sale of immovable property, such as land, buildings, or house property, aligns with the taxation rules applied to other capital assets.

Long-Term Capital Gain Tax Calculation on Property Sale in India

According to Section 112 of the Income Tax Act, Long-Term Capital Gain (LTCG) arising from the sale of immovable property in India are subject to a tax rate of 20%, with the benefit of indexation. To avail the indexation benefit, taxpayers can calculate the indexed cost of acquisition using the Cost Inflation Index (CII). This enables them to determine the long-term capital gain accurately.

The cost of improvement encompasses expenses incurred by the taxpayer for enhancing or adding to the capital asset. Similarly, taxpayers can calculate the Indexed Cost of Improvement utilizing the CII.

In the context of property transactions in India, certain key considerations come into play when calculating capital gains for tax purposes:

Sale Consideration: As per Section 50C of the Income Tax Act, the sale consideration for immovable property is determined as the higher of the sale value of the capital asset or the value adopted by the stamp duty valuation authority.

Transfer Expenses: These are expenses incurred specifically for the sale of the capital asset.

Indexed Cost of Acquisition: This is calculated by multiplying the cost of acquisition by the Cost Inflation Index (CII) of the year of sale divided by the CII of the year of purchase.

Indexed Cost of Improvement: Similarly, the indexed cost of improvement is determined by multiplying the cost of improvement by the CII of the year of sale divided by the CII of the year of improvement.

Capital Gain Exemption: Taxpayers may be eligible for capital gain exemption under Sections 54 to 54GB, provided they fulfill the specified conditions.

Short-Term Capital Gain Tax Calculation on Property Sale in India

In the case of short-term capital gain from the sale of immovable property, tax is levied according to the applicable slab rates. Unlike long-term capital gains, short-term capital gain does not benefit from indexation. Additionally, exemptions under Sections 54 to 54GB are not applicable to short-term capital gain. Therefore, the capital gain is computed based on the cost of acquisition, cost of improvement, and transfer expenses.

Consider a scenario where a taxpayer decides to sell the rights to an under-construction property before taking possession of it. This situation raises questions about the calculation of capital gain and associated tax liabilities.

Let’s delve into the intricacies of handling capital gains in such circumstances:

For instance, Darshil invests INR 20 Lakh on 01/01/2012 to secure a house in a housing scheme, with possession slated for 01/01/2016. However, before completion, Darshil opts to sell the rights to the property due to finding a more favorable scheme.

The tax implications hinge on the timeline between the property booking and the agreement to transfer rights in the under-construction property.

Different Scenarios:

1. If Darshil transfers the rights before 01/01/2015:
   • Short-term capital gain arise as the holding period is less than 36 months.
   • No indexation benefit applies.
   • Taxable at the normal slab rates.
   • No capital gain exemption is applicable.
2. If Darshil transfers the rights after 01/01/2015:
   • Long-term capital gain occur as the holding period exceeds 36 months.
   • Indexation benefit applies to the amount payable to the builder, stamp duty, and registration fees.
   • Taxable at a rate of 20%.
   • Exemptions under Section 54F and Section 54EC are available.

It’s important to note that Section 54 exemption for the purchase of new residential property against the sale of existing residential property does not apply in this scenario.

Set Off & Carry Forward Loss:

• Short-term capital loss (STCL) can be set off against both short-term capital gain (STCG) and long-term capital gain (LTCG). Any remaining loss can be carried forward for 8 years.
• Long-term capital loss (LTCL) can only be set off against LTCG. The remaining loss can also be carried forward for 8 years.

Reporting Income from Sale of Immovable Property:

• Due Date: 31st July of the Assessment Year
• ITR Form: File ITR-2 (for Capital Gains Income) on the Income Tax Website. Report gains in Schedule CG.

By understanding these nuances and adhering to tax regulations, taxpayers can effectively manage their capital gains and fulfill their reporting obligations.

To report income from the sale of land, building, or both, follow these steps:

Navigate to the Schedule Capital Gains

Navigate to the Schedule Capital Gain section of your Income Tax Return (ITR) form. Within Schedule Capital Gains, locate and click on the checkbox corresponding to the type of asset you sold – whether it’s land, building, or both.

Add details

Click on continue and on the next page select the option of land and building and then click on add details.

Add the dates for sale and purchase

Select the dates for purchase and sales to calculate long-term or short-term capital gain.

Enter the sales value and purchase cost:

1. Input the amount received as sales consideration for the land, building, or both that you sold.
2. Provide details of the purchase cost, including the initial acquisition cost and any expenses incurred for improvements. If the capital gain are long-term, the indexation costs will be calculated automatically.

Add deduction details for section 54

In case of long-term capital gains, enter the investments made to take the benefit of section 54.

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

To offset Short Term Capital Gain (STCG) on the sale of immovable property, taxpayers can utilize Short Term Capital Losses from other assets and claim deductions under Chapter VIA since STCG is taxed at slab rates. However, deductions under Chapter VIA cannot be claimed for Long Term Capital Gains (LTCG). In the case of LTCG, taxpayers can offset losses from both long-term and short-term assets.

To mitigate tax liability on the sale of residential property, taxpayers can opt for capital gain exemptions provided under Sections 54F and 54GB by reinvesting in another residential property or eligible equity shares. Additionally, exemptions under Sections 54EC and 54EE are available for investments in specified bonds or funds, respectively. It’s essential to adhere to the holding period requirements stipulated by the relevant section to qualify for these exemptions.

Inherited properties are not taxable when received, but upon sale, they incur Capital Gains tax. To calculate the tax liability, subtract transfer expenses and acquisition costs from the sale consideration. For Short Term Capital Gain (STCG), use the acquisition cost of the previous owner, while for Long Term Capital Gains (LTCG), calculate the indexed cost of acquisition based on the year of acquisition by the previous owner.

Remember, the holding period for determining STCG or LTCG starts from the date of purchase by the previous owner, and the indexed cost of acquisition is computed according to the year of acquisition by the previous owner.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/