Capital gains can be loosely termed as the profit generated from the sale of any investment or property. Depending on the holding period of these assets, capital gains are classified into two categories, namely – long-term capital gains and short-term capital gains.
This bifurcation between short and long-term gains is done to understand the tax implications on the respective gains. For instance, the transfer or sale of a house property triggers taxability on the same for assesses, which can be either long or short-term, depending on their holding period.
For instance, if an individual purchased the property 10 years ago and sells it now, the property will fetch a significant corpus on its purchase value. This appreciation on purchase value is the capital gain on the property, and the assessee is liable to pay taxes on it. Since the holding period of the property is 10 years it will be liable for long-term capital gain tax on the property.
When is a Capital Gain From Property Deemed to be Long Term?
According to the Income Tax Act, 1961, any immovable property with a holding period of more than 24 months is classified under long-term capital assets and is liable to be taxed under LTCG tax on property rules.
However, without the existence of any definite mechanism under the Act to determine the exact date of acquisition of any immovable property, the issue of levying income tax was debatable for years. This was especially a problem to compute the taxation for the acquisition of under-construction properties.
Even after several judicial precedents, the matter of the date of acquisition is still disputed, even today.
Calculation of Long-Term Capital Gains from Property
The table below illustrates the calculation of LTCG from property –
|Sale value of property
|Sale value accrued or received against the transfer of property.
|Expenses incurred in the course of the transfer of property
|These expenses include additional costs like brokerage charges, commission, registration fees, stamp duty, lawyer’s fees, etc.
|Cost of acquisition of property after indexation
|Cost of acquisition refers to the cost incurred during the time of asset acquisition. Indexation is a calculation of this cost after taking the effects of inflation into account.
|Cost of asset improvement after indexation
|Cost of asset improvement refers to the expenses incurred after the acquisition of the said asset. It can include any modification or a major addition to the existing property. This improvement cost is also adjusted according to the effect of inflation.
|Gross long-term capital gains
|There are exemptions available under Sections 54, 54EC, and 54B for long-term capital gain tax on property.
|Net Long-Term Capital Gains
Inflation refers to the sustained rise in prices that occur over the years. To account for the rise in the value of an asset due to inflation, the Income Tax Act has introduced the Cost Inflation Index (CII). The table below gives the cost inflation index for the past five years –
|Cost Inflation Index
Tax Implications on LTCG on Property
Currently, the long-term capital gain tax rate on a property is set at 20% with the addition of cess and surcharge. This tax rate is applicable on every property sold after 1st April 2017.
However, this tax implication is not valid for any inherited property. For instance, ancestral properties inherited from family members by way of gifts will not be taxed until the inheritor decides to sell off the same. If the said individual sells off the property, then the long-term capital gains generated from it will be taxed under the same rules as applicable for other properties.
Following are a few crucial points to remember about the LTCG tax rate on the property –
- Individuals can adjust their sale consideration of the asset to include any commission or brokerage charges they paid during the acquisition of the same.
- Assesses can choose to deduct any additional expenses incurred due to home improvement or construction in the duration of holding the asset.
- Capital gains from the property are eligible for tax exemptions under Sections 54, 54B, and 54EC.
Tax Exemptions on Long-Term Capital Gains on Property
The imposition of a 20% LTCG tax rate on a property can lead assesses to incur a significant amount of tax liabilities. However, several exemptions under the Income Tax Act can provide assesses with relief from the tax burden. Individuals can benefit from these exemptions when the profit from the sale of their property is re-invested in the purchase of another asset.
Following are a few exemptions available on long-term property gain tax in India –
Tax Exemptions Available under Section 54
Under this section, assesses can avail tax benefits on LTCG from the sale of house property if they invest the same in the purchase of up to two house properties. This exemption can be availed by the assessee only once in his or her lifetime, under the condition that capital gains should not exceed a corpus of Rs. 2 Crore.
Also, taxpayers have to invest their capital gain amount and not the sale proceeds collected while selling their assets. If the purchase price of these new properties exceeds that of the previously acquired capital gains, tax exemption will be applicable only on the capital gain, and not on the entire amount.
To avail of this benefit, assesses must comply with the following conditions:
- The purchase of new properties must be complete either 1 year before the sale of the current property or 2 years after its sale.
- Instead of the purchase of new properties, capital gains can also be invested in the due course of construction of a property, given that construction must be completed within 3 years from the date of sale of the current property.
- This exemption can be retracted if these new properties are sold within three years of their construction or purchase.
Tax Exemptions Available under Section 54EC
Individuals can avail of these exemptions on long-term capital gain tax on a property if the profit from selling the property is re-invested to purchase specific bonds. Following are a few conditions regarding it –
- Assesses can choose to reinvest profit generated from the sale of their property into investment schemes like bonds, for up to an amount of Rs. 50 Lakh issued by institutions like REC, NHAI, etc.
- Assesses can redeem their invested amount after 3 years, but cannot sell the newly purchased assets before the completion of 3 years from the selling date. Additionally, from the financial year 2018-19, this period of 3 years has been extended to 5 years.
- Owners of the asset can choose to invest their gains from selling their property into these bonds within 6 months from the same. Also, to claim the benefits of this exemption, homeowners have to make their investments before the deadline for their tax filing.
Tax Exemptions Available under Section 54B
Exemptions on LTCG tax on a property can also be availed if the gains are acquired from any land used for agricultural purposes for 2 years before selling them. The exemption can be availed if the gain is reinvested into new agricultural land within 2 years from the transfer date.
Additionally, this newly purchased agricultural land cannot be sold under 3 years from its date of purchase. If under any circumstances, the landowner is unable to purchase a new agricultural land before their income tax return filing deadline, they can deposit their capital gains in a deposit account under any branch of a public sector bank under the Capital Gains Account Scheme, 1988.
These exemptions are instrumental when it comes to reducing an individual’s tax liability. That is why it is crucial for assesses to check the exemptions they can avail of before computing total taxes on their long-term capital gains from property.
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