Sold Your Property? Know How the Capital Gains Will be Taxed
July 15, 2023 Mutual Fund
“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth,” says Robert Kiyosaki, the author of the bestseller ‘Rich Dad, Poor Dad‘ and a celebrated investor who made millions of dollars investing in real estate.
Real estate or property investment over the last few years has generated decent returns. According to the analysis done by ANAROCK, a leading international property consultant, there has been an 11% rise in the last five years — from Rs 5,551 per square ft. in 2018 to approximately Rs 6,150 per square ft. — in the current average prices in the top seven cities of India.
The year 2022 particularly witnessed a maximum yearly rise (of 6% on average), compared to the previous four years. Besides, 2022 saw a decent improvement in rental yields breaching pre-COVID levels of 2019 across all top seven cities. This has augured well for investors in real estate who look for capital appreciation plus rental yield.
In the financial year 2022-23, if you sold/transferred your property (be it commercial, residential, or piece of land) or planning to sell it soon, it is important to be mindful of the tax implications.
Note that real estate, i.e. residential property, commercial property and land, is classified as a ‘Capital Asset’ [under Section 2(14) of the Income Tax Act, 1961] and therefore, the capital gains made will be subject to ‘Short Term Capital Gain Tax’ or ‘Long Term Capital Gain Tax’ as the case may be.
Holding Period to classify Short Term Capital Asset and Long Term Capital when you sell the Property
If the holding period of the real estate or the property from the date of acquisition/purchase till the date of selling/transferring is less than 24 months from the date of its acquisition and if the sale/transaction is at a gain, it will be referred to as a ‘Short Term Capital Gain (STCG)’.
Note, from Financial Year (FY) 2017-18 the holding period in case of real properties (non-agriculture land, house property, building that is residential or commercial) to define STCG is reduced to 24 months from earlier 36 months.
Computation of Short Term Capital Gain on Sale/Transfer of Property
To compute STCG on the real estate property, from the Full Value of Consideration received, i.e. the Sale Value, one can deduct (i) Expenditure incurred wholly and exclusively in connection with the transfer; (ii) Cost of Acquisition (i.e. the total cost you hard earlier paid to acquire the real estate property); and (iii) Cost of Improvement (i.e. the incidental expenses of capital nature paid by you to make alterations or additions to the property) if any. The remainder will be the STCG.
How is Short Term Capital Gain on the Sale/Transfer of Property Taxed
The STCG on real estate or property (commercial, residential, and land) will attract a ‘Short Term Capital Tax’, which is taxed as per your tax slab, along with applicable surcharge plus health and education cess.
Long Term Capital Gain on Sale/Transfer of Property
On the other hand, if the real estate property is held for a period of more than 24 months from the date of its acquisition till the date of selling/transferring, and if you have made gains, it will be referred to as a ‘Long Term Capital Gain (LTCG)’.
How is Long Term Capital Gain on the Sale/Transfer of Property Taxed
To compute your LTCG on the real estate property, the Full Value of Consideration received, i.e. the Sale Value, one can deduct (i) Expenditure incurred wholly and exclusively in connection with such transfer; (ii) Indexed Cost of Acquisition (i.e. the total cost you hard earlier paid to acquire the real estate property but adjusted for inflation impact with the help of Cost of Inflation Index); and (iii) Indexed Cost of Improvement if any (i.e. the incidental expenses of capital nature paid by you to make alterations or additions to the property but adjusted for inflation impact with the help of Cost of Inflation Index). The remainder will be the LTCG.
Calculation of Indexed Cost of Acquisition and Indexed Cost of Improvement
To compute the indexed costs, the Central Government every year in the official gazette notifies the Cost Inflation Index (CII), and currently, it is as under:
Table: Cost of Inflation Index
| Sl. No. |
Financial Year |
Cost Inflation Index |
| 1 |
2001-02 |
100 |
| 2 |
2002-03 |
105 |
| 3 |
2003-04 |
109 |
| 4 |
2004-05 |
113 |
| 5 |
2005-06 |
117 |
| 6 |
2006-07 |
122 |
| 7 |
2007-08 |
129 |
| 8 |
2008-09 |
137 |
| 9 |
2009-10 |
148 |
| 10 |
2010-11 |
167 |
| 11 |
2011-12 |
184 |
| 12 |
2012-13 |
200 |
| 13 |
2013-14 |
220 |
| 14 |
2014-15 |
240 |
| 15 |
2015-16 |
254 |
| 16 |
2016-17 |
264 |
| 17 |
2017-18 |
272 |
| 18 |
2018-19 |
280 |
| 19 |
2019-20 |
289 |
| 20 |
2020-21 |
301 |
| 21 |
2021-22 |
317 |
| 22 |
2022-23 |
331 |
| 23 |
2023-24* |
348 |
* Provisional
(Source: https://incometaxindia.gov.in)
By taking into consideration indexation, the cost of acquisition of the real estate property and cost of improvement thereon (if any) is reduced for the inflation effect, thus enabling in reducing the tax liability in the case of LTCG.
The Indexed Cost of Acquisition for LTCG is computed as below with Financial Year 2001-02 as the base year.
If the real estate property is purchased before the base year, the actual Fair Market Value (FMV) as of April 1, 2001, will be considered.
If the improvements are to the real estate property, which are incidental expenses of a capital nature paid by you, the owner and assessee, to make alterations or additions to the property; then the Indexed Cost of Improvement is calculated as under:
But if the cost of the improvement was incurred before April 1, 2001, then that must be ignored as per the prevailing tax provisions.
The LTCG on the property will be taxed @20% (with indexation benefit) along with the applicable surcharge, plus the health and education cess.
What if the real estate property sold previously came by the way of a gift, will, inheritance, or succession?
Well, in such a case the period of holding of the property concerning the previous owner will also be included to determine Short Term Capital Asset or Long Term Capital Asset and the gains made at the time of sale of the property will be subject to STCG tax or LTCG tax, as the case may be.
Ways to save capital gains made on sale on sale/transfer of property from the axe of tax
The Income Tax Act, 1961 allows certain exemptions under relevant Sections, which, if used legitimately, can save you from the axe of tax.
Section 54: This Section grants exemption from the capital gain tax on the transfer/sale of residential house properties if you, as an individual or Hindu Undivided Family (HUF) assessee, invest the capital gains proceeds to purchase or construct another residential house in India.
Another key condition is that within a period of one year before or two years after the date of transfer of the old house, the taxpayer should acquire another residential property or should construct a residential property within a period of three years from the date of transfer of the old house. And in the case of compulsory acquisition, the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional).
With effect from the Assessment Year 2020-21, i.e., Finance Act, 2020, the capital gain exemption is available for the purchase of 2 residential properties in India, and the exemption is subject to the capital gain not exceeding Rs 2 crore. Further, if you, the assessee exercise this option, you shall not be entitled to exercise this option again for the same or any other assessment year.
Further, with effect from the Assessment Year 2024-25 (relevant to the Financial Year 2023-24), i.e., from 1st April 2023, the government has put a cap of Rs 10 crore to avail the maximum exemption on capital gains under Section 54. As per the current tax rule, if the cost of a new asset exceeds Rs 10 crore, the excess amount shall be ignored for computing the exemption under Section 54.
To utilise the benefit of this Section, it is provided further that the capital gains should be less than Rs 2 crore and the purchase of the new real estate property is done either 1 year before the sale or 2 years after the sale/transfer of the original property. And in case the capital gain proceeds are invested in the construction of the property in India, the construction must be completed within 3 years from the date of sale.
Note that if you sell the new house within 3 years from the date of purchase of construction, then the capital gain availed under this Section will be taxable in the year of sale of the new house property, and the cost of acquisition shall be disallowed as a deduction, and the property will be subject to capital gains tax.
Section 54F: This Section grants full exemption from the capital gain tax to individuals and HUFs on the transfer/sale of any asset other than a house/residential property.
To avail of this exemption, the net sale consideration of the old property needs to be invested to purchase a new residential property. Further, the purchase must be either one year before or two years after the sale of the asset, i.e., the old property. And in case the new residential property is under construction, within three years from the date of sale of the old property.
Moreover, when availing of this exemption, the assessee should not be owning a residential property other than one bought for claiming this exemption.
Note that if the entire sale proceeds are not invested to claim a full exemption under Section 54F, and instead only a proportionate net consideration from the sale of old other than a house property is invested; the amount of exemption you can claim is calculated proportionately as under:
With effect from 1st April 2023, the maximum exemption one can avail of is capped at Rs 10 crore (Assessment Year 2024-25, relevant to the Financial Year 2023-24). If the cost of new residential property exceeds Rs 10 crore, as per the current tax rule, the excess amount shall be ignored for computing the exemption under Section 54F.
Keep in mind, if you transfer/sell the newly purchased residential house, within a period of three years from the date of its purchase/acquisition or construction, as the case may be, then the exemption allowed earlier under Section 54F will be reversed and will be subject to Long Term Capital Gain tax.
Moreover, if you purchase an additional residential house (other than the new residential house purchased to claim an exemption under section 54F and have claimed it) within one year from the date of transfer of the real estate property, then the exemption under 54F will not be available to you.
Similarly, if you construct an additional residential house (other than the new residential house constructed to claim an exemption under section 54F and have claimed it) within three years from the date of transfer of the real estate property, then the exemption under 54F will not be available to you.
Given the above conditions, you ought to be very careful with the dates when you are considering buying more than one real estate new property after selling the ones held earlier. Otherwise, the amount of capital gain arising from the transfer/sale of the original asset, which was not charged to tax, will be deemed to be the income by way of long term capital gains of the year in which the new house is transferred or another residential house (other than the new house) whose income is taxable under the head “Income From House Property”.
Section 54B: Remember, Agricultural Land in India, if it follows certain conditions, is not considered a Capital Asset. If the individual or HUF assessee’s agricultural land is compulsorily acquired under any law and the consideration of which is received and approved by the Central Government or the RBI, then it will not be taxable as per the provisions of Section 10(37) of the Income Tax Act, 1961.
But if the agricultural land, where the required conditions under the Income Tax Act are not satisfied but the land was used for agriculture purposes for two years immediately before the date of transfer/sale; then to save the capital gain, the individual or HUF assessee, can invest the capital gain into a new agriculture land within 2 years from the date of transfer/sale.
The amount of exemption that can be claimed under this section is lower of the following:
– The capital gain arising from the sale of agricultural land; or
– The amount invested in new agricultural land
The new agricultural land that is purchased to claim the gain tax exemption, should not be sold within three years from the date of its purchase, otherwise, the exemption will be reversed and subject to Long Term Capital Gain Tax.
Section 54EC: This exemption is available to individuals, HUFs (and other assessees, viz. partnership firms, LLPs, etc.) when Long Term Capital Gains arising from the sale of house property, land or both are reinvested into specified bonds viz. National Highway Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), or Indian Railways Finance Corporation (IRFC). As the house owners or landlord, you have 6 months to invest in these bonds from the date of transfer/sale of the house, land or both. The maximum one can invest in these bonds is Rs 50 lakh, and the maturity tenure of these tax-saving bonds is 5 years. After 5 years period, investment in these bonds can be redeemed. In case the capital gain bonds are converted into cash before the period of maturity (of 5 years), then the amount so invested on which tax exemption was claimed, would be taxable as long-term capital gain in the year of conversion.
What if there is a Capital Loss when you sell the property?
When a ‘Capital loss’ is incurred and not a capital gain on the transfer/sale of your real estate property, do note that the Income Tax Act, 1961 permits you to carry forward and set-off the loss against the head ‘Capital Gain’.
The Long Term Capital Loss can be set-off only against Long Term Capital Gains, whereas, the Short Term Capital Losses are permitted to be set-off against both Long Term Capital Gains and Short Term Capital Gains.
In case you have not been able to set-off the capital losses in the same Assessment Year, a carry forward is permitted up to 8 years for both Short Term as well as Long Term Capital Loss.
To sum-up…
When you sell your real estate property, weigh all the pros and cons, and be cognizant of the tax implications. Also, reinvest the money sensibly in tax-saving avenues to compound wealth, including tangible assets that can be passed on to your loved ones, and utilise the capital gain exemptions sensibly.
Happy Investing and Tax Planning!
This article first appeared on PersonalFN here
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