Date: October 11, 2023 Author: Team Piramal Realty
Capital Gain Tax on Sale of Property
When selling a property in India, understanding the implications of capital gain tax on the sale of property is crucial for financial planning. This blog delves into the nuances of capital gains tax, including its types, recent updates for 2024, and how it impacts property transactions. Whether you're a homeowner, investor, or prospective seller, this comprehensive guide will help you navigate the complexities of capital gains tax and make informed decisions.
Piramal Realty brings you insightful updates and strategies on capital gains tax in India, reflecting the latest amendments introduced in 2024. From understanding the distinction between short-term and long-term capital gains to exploring exemptions and deductions, this blog provides valuable information tailored for property owners and real estate enthusiasts. Discover how these changes influence the real estate landscape and learn ways to optimize your tax planning.
What is Capital Gains Tax in India?
Capital gains tax in India is the tax levied on the profit earned from the sale of a capital asset, such as property, shares, or bonds. When you sell a property at a price higher than its purchase value, the profit, known as a capital gain, is subject to taxation under the Income Tax Act. The capital gain tax on sale of property is categorized into short-term or long-term based on the duration of ownership, with distinct tax rates and calculation methods for each. Understanding the nuances of capital gains tax is essential for homeowners and investors to ensure compliance and optimize financial outcomes.
2024 Budget Updates in Capital Gains Tax India
The Budget 2024 brought several significant changes to the taxation of capital gains, impacting both financial and non-financial assets, including property. Key updates include:
Simplified Holding Periods: Assets are now classified into long-term and short-term using only two holding periods: 12 months and 24 months. The 36-month holding period has been eliminated. For listed securities, a holding period exceeding 12 months is considered long-term, while for all other assets, the holding period is 24 months.
Revised Short-Term Capital Gains Tax: The capital gains tax rate for short-term gains on listed equity shares, equity-oriented fund units, and business trust units has increased from 15% to 20%. Other short-term assets continue to be taxed at applicable slab rates.
Long-Term Capital Gains Tax Changes: The exemption limit for long-term capital gains on equity shares, equity-oriented units, and business trust units has increased from ₹1 lakh to ₹1.25 lakh per year. However, the tax rate for these gains has increased from 10% to 12.5%, effective from July 23, 2024.
Reduction in Tax on Long-Term Non-Financial Assets: The tax on long-term non-financial assets, including property, has been reduced from 20% to 12.5%. The indexation benefit for such assets has been eliminated. For real estate transactions involving assets purchased before July 23, 2024, taxpayers can choose to compute taxes either at 12.5% without indexation or at 20% with indexation.
Long Term Capital Gain Tax on Property
When a property is held for more than 24 months, the profit from its sale is classified as a long-term capital gain and taxed accordingly. For long-term capital gain tax on property, the taxable amount is determined after deducting the indexed cost of acquisition and improvement from the sale price, provided the property was purchased before July 23, 2024. For properties acquired after this date, indexation benefits are no longer available, and the gain is taxed at a revised flat rate of 12.5%. These changes to the capital gain tax on sale of property emphasize the importance of understanding updated regulations to optimize tax planning.
Short Term Capital Gain Tax on Property
Short-term capital gain tax on property applies when the property is sold within 24 months of purchase. The gain from such a sale is taxed as per the individual's income tax slab, meaning the rate of tax is based on the seller’s total income, including the profit made from the property sale. This results in a potentially higher tax liability, as the capital gain is added to the seller’s other income and taxed accordingly.
For transactions involving capital gain tax on sale of property, the absence of indexation for short-term gains means that the entire sale profit is subject to tax without any adjustments for inflation. Therefore, property owners who sell within this shorter period may face a significant tax burden, making it essential to consider the timing of the sale for better tax efficiency.
Short-Term vs. long term capital gain tax on property
The below table clearly outlines the key differences between short-term and long-term capital gain tax on property, helping you understand the implications of selling a property within different time frames.
Aspect
Short-Term Capital Gain Tax on Property
Long-Term Capital Gain Tax on Property
Holding Period
Less than 24 months
More than 24 months
Tax Rate
Taxed as per income tax slabs
12.5% (from 2024 onwards)
Indexation Benefit
Not available
Available for properties purchased before July 23, 2024 (choice between 12.5% without indexation or 20% with indexation)
Taxable Amount
Entire profit is taxed without inflation adjustment
Profit is adjusted with the cost of inflation (indexation)
Taxation Method
Taxed at the applicable income tax slab rate
Flat tax rate on the gain after indexation (if applicable)
Exemption Options
No exemptions available for short-term gains
Exemptions available under sections like 54 for reinvestment in new property
Calculation of capital gain tax on sale of property
When calculating capital gain tax on sale of property, the process differs for short-term and long-term gains. Below is an overview of how to calculate both types of capital gains:
Short-Term Capital Gains Calculation
Full Value of Consideration: Begin with the sale price of the property.
Deduct:
Expenditure incurred exclusively for the transfer.
Indexed cost of acquisition and improvement (adjusted for inflation).
Resulting Amount: The remaining amount is the long-term capital gain, which is taxed at a flat capital gains tax rate of 12.5% for properties sold after July 23, 2024 (without indexation). For properties sold before this date, taxpayers can choose to pay taxes either at 12.5% without indexation or 20% with indexation.
Formula: Long-term capital gain = Full value consideration – (Expenses + Indexed cost of acquisition + Indexed cost of improvement)
The indexation process adjusts the cost of acquisition and improvement for inflation, lowering the capital gain and, therefore, the tax burden. However, the indexation benefit has been removed for properties bought after July 23, 2024, leaving taxpayers with the option to pay tax at the reduced rate of 12.5% without indexation or opt for 20% tax with indexation for older assets.
Exemptions and Deductions (Updated for 2024)
Exemptions and deductions are essential tools for reducing the capital gain tax on sale of property, especially when the profits from the sale are reinvested into new property. These provisions provide significant tax relief and help property owners manage their tax liabilities effectively.
A key exemption under Section 54 allows taxpayers to avoid paying tax on long-term capital gains from the sale of residential property if the capital gain is reinvested in purchasing or constructing another house. This provision was updated in Budget 2019, enabling taxpayers to use capital gains from the sale of a property to invest in two new house properties (instead of one), provided the total capital gain does not exceed Rs. 2 crore.
Example: Rajesh bought a house in January 2005 for Rs. 40 lakh, and in FY 2023-24, he sold it for Rs. 1.5 crore. Since this property was held for more than three years, it qualifies as a long-term capital asset. After applying indexation, the cost of acquisition comes out to Rs. 85 lakh. Hence, the capital gain from the sale is Rs. 65 lakh (Rs. 1.5 crore – Rs. 85 lakh). At the long-term capital gain tax on property rate of 20%, Rajesh would owe Rs. 13 lakh in taxes. However, Rajesh could reinvest the entire capital gain of Rs. 65 lakh into two new house properties, thus qualifying for Section 54 exemptions. By doing this, he can reduce or entirely avoid paying tax on the long-term capital gain from the sale of his original property.
Key Conditions for Availing Exemption Under Section 54:
The new property must be purchased within one year before or two years after the sale, or the construction should be completed within three years.
The exemption is available only for the capital gain amount and not the entire sale proceeds.
If the newly acquired property is sold within three years, the exemption is reversed.
The exemption under Section 54 can only be availed once in a taxpayer's lifetime.
Impact on Real Estate Transactions
The capital gain tax on sale of property plays a significant role in influencing real estate transactions, particularly in the luxury apartment market. With the updates to capital gains tax laws in 2024, property investors and owners in the luxury segment need to consider tax implications carefully. The increased exemptions and changes in tax rates may encourage more investment and reinvestment in high-end properties, as individuals seek to optimize their tax liabilities through strategic planning, such as reinvesting capital gains in additional luxury properties.
As the luxury real estate market continues to grow, understanding the nuances of capital gain tax on sale of property will be crucial for both sellers and buyers. For property owners looking to sell or invest in luxury apartments, staying informed about the latest tax provisions, exemptions, and deductions can significantly impact financial outcomes and drive decision-making in this competitive sector.
FAQs
How do you calculate capital gains tax on a property sale?➕
Capital gains tax on property sale is calculated based on the type of gain:
Short-term gain: Subtract purchase cost, improvement cost, and transfer expenses from the sale price. The result is taxed as per the applicable income tax slab.
Long-term gain: Deduct the indexed cost of acquisition, indexed cost of improvement, and transfer expenses from the sale price. The resulting amount is taxed at 12.5% (without indexation) or 20% (with indexation), depending on when the property was purchased.
How much capital gain is tax-free on property?➕
Long-term capital gains are tax-free if reinvested under Section 54 in another property within stipulated timelines, subject to conditions. Gains up to ₹2 crores can be used to purchase up to two properties for exemption.
What is the capital gains tax on property in 2024?➕
From July 23, 2024, long-term capital gains tax on property is 12.5% without indexation or 20% with indexation for assets purchased before this date. Short-term capital gains continue to be taxed as per income tax slab rates.
Is it mandatory to show the sale of property in ITR?➕
Yes, reporting property sales in the Income Tax Return (ITR) is mandatory. Any profit from the sale must be disclosed, even if exempt under sections like 54 or 54EC, to ensure compliance.
What is the limit of capital gain exemption?➕
The exemption limit for long-term capital gains under Section 54 is ₹2 crores if the gains are reinvested in up to two properties. For investments in bonds under Section 54EC, the maximum limit is ₹50 lakhs.
What is the period of holding for capital gains?➕
Short-term capital gain: Property held for 24 months or less.
Long-term capital gain: Property held for more than 24 months.
How much is short-term capital gains tax on property?➕
Short-term capital gains on property are taxed as per the seller’s income tax slab rate. No indexation benefit is available, making the entire gain taxable.
How is long-term capital gains tax calculated on property?➕
For long-term capital gains, subtract the indexed cost of acquisition and improvement, along with transfer-related expenses, from the sale price. The resulting gain is taxed at 12.5% (for properties bought after July 23, 2024, without indexation) or 20% (with indexation for earlier purchases).
What is the exemption limit for long-term capital gains?➕
Long-term capital gains are exempt under Section 54 if reinvested in residential property within the specified time frame, up to ₹2 crores. Under Section 54EC, investments in notified bonds have a limit of ₹50 lakhs.
Disclaimer- The views expressed above are for informational purposes only based on industry reports and related news stories. Piramal Realty does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.
