Capital Gain Tax on Sale of Property & Save Capital Gains Tax

What is Capital Gains Tax?

When a property is sold in India, the profit earned is called capital gains. The person gaining benefits from these capital gains might be taxed, subject to a few conditions. If the profits from the sale are invested within a given time frame, tax on sale of property in India can be avoided. Otherwise, the person must pay the capital gain tax on sale of property after adjusting the costs incurred with the sale value.

The capital gain on sale of property can be either long-term or short-term. This division is done to understand the tax implications subject to the holding period. For instance, if a property was purchased 12 years back and is sold now, there is a significant appreciation in the value of the land. This appreciation in the value is called the capital gain on the property, and the owner must pay tax on it. Since the land was owned for 12 years, it is now liable for long term capital gain tax on property.

There are some tax exemptions that might apply to decrease the tax liability on capital gains. For instance, if a property is held for a specific period, it might be eligible for an exemption for long-term capital gains tax.

What is Short-Term Capital Gain on the Sale of Land?

The capital tax payable on property that has been held for a short period, of 36 months or less, is known as short-term capital gain. For a capital asset sale to be considered a short-term capital gain, it should have been held only for 36 months or less before the sale or transfer. Immovable property like homes are considered to be short-term capital assets for 24 months or less. This amount is added to the individual’s existing income and then taxed according to the specified income tax slab.

Short-Term Capital Gain Calculation

Short-term capital gain on sale of property can be calculated by subtracting the net consideration received from the cost of the property. The factors that impact the calculation are:

Consideration received: This is the total value of money received after selling or transferring the property
Cost of acquisition: This is the amount that was spent to buy the property
Cost of renovation: If any alterations or renovations were made to the property after purchase, the cost is added to the acquisition cost
Expenses related to sale or transfer: Any expenses incurred during the sale can be deducted from the sale price to calculate the exact consideration received. These expenses can be brokerage fees or legal fees.

The tax on sale of property for short-term assets is typically higher than that of long-term capital assets.

What is Long-Term Capital Gain on the Sale of Land?

Depending on the capital asset, the threshold for long-term capital gains is either 36 months of 24 months. For housing property, the limit is 24 months or more. The profits from such transactions are classified as long-term capital gain on sale of property.

Long-Term Capital Gain Calculation

The long-term capital gain calculation is also done by subtracting the net consideration received from the property cost. However, the factors that influence this calculation are:

Consideration received: This is the total value of money received after selling or transferring the property
Indexed cost of acquisition: The original cost of purchase is adjusted for inflation using the CII or the Cost Inflation Index. This reflects the current value of the land
Cost of renovation: If any alterations or renovations were made to the property after purchase, the cost is added to the acquisition cost, after using the CII to adjust for inflation
Expenses related to sale or transfer: Any expenses incurred during the sale can be deducted from the sale price to calculate the exact consideration received. These expenses can be brokerage fees or legal fees.

Generally, long-term capital gains tax on property is 20%, for sale of land done after 24 months.

Exemptions of the Capital Gains Tax

Based on the type of reinvestment made, there are some exemptions available from capital gains tax on sale of property. These exemptions are available under four sections of the Income Tax Act – 54, 54B, 54F, 54EC.

Section 54

Under this section, exemptions are claimed on capital gains on sale of property under these situations:

If the capital gains have been reinvested in only two housing properties. Earlier, exemptions could be claimed only on one property.
The total capital gains should not exceed Rs. 2 crore.
The investment has to be made within one year before or two years after the sale.
If the money is invested in construction, the construction must be done in under three years from the date of sale.
If the newly bought property is sold in under three years of purchase, the tax exemption will be revoked, and capital gains tax on sale of property will be applicable on the sale.

Section 54B

Tax exemptions under this section are applicable only on capital gains earned from the sale of agricultural land that is located outside rural areas, and is used for agricultural reasons. There are some conditions that have to be met to avail these tax exemptions. These are:

The rural area must be situated 2 km away from the local limits of either a municipal corporation or a cantonment board. The population must also be within 10,000 to 1 lac.
The capital gain has to be used for the purchase of other agricultural land. This purchase must be done in two years from the date of sale.
The exemption is provided only on the capital gain, and not on the entire sale consideration. The exemption amount is calculated based on the reinvestment in the new agricultural land.
If the newly bought agricultural land is sold in under three years of purchase, the tax exemption gets revoked, and capital gains tax on sale of property will be applicable on the sale.

Section 54F

Tax exemptions can be made on capital gains generated from the selling of long-term capital assets, excluding housing property. The details are:

The long-term capital assets must not include housing property.
The entire amount of money received as consideration from the sale of the capital asset has to be reinvested in not more than two housing properties.
The investment has to be made within one year before the sale or two years after the sale.
If the money is invested in construction, the construction must be done in less than three years from the date of sale.
The exemption will be given on the total capital gain amount only if the entire consideration amount is reinvested. If the whole amount is not reinvested, the exemption will only be done on the amount reinvested.

Section 54EC

Under Section 54EC of the Income Tax Act, tax exemptions can be availed on capital gains from the sale of property by reinvesting it in bonds by NHAI (National Highway Authority of India) and REC (Rural Electrification Corporation)

A maximum amount of Rs. 50 lakhs can be invested to claim exemptions
The investment in these bonds can be redeemed only after a period of 5 years.
The investment in the bonds has to be done within six months of the date of sale or before filing taxes.
If it is not possible to invest in the bond before filing the tax, the money can be deposited in any public sector bank or a bank listed under the Capital Gains Account Scheme (CGAS).
If the money deposited is converted into an investment in under two years from the sale date, the exemption is valid. But if the deposit remains as is after two years, it is considered to be short-term capital gains.

How to Save Capital Gains on Property

Capital gains tax on sale of land can be saved by using some of these methods:

Capital gain losses: The capital gains tax can be saved by setting off the profit against the capital gains losses. However, the losses must be from a previous date. But short-term capital losses can only be set off against short-term gains and long-term losses against long-term gains.
Capital Gains Account Scheme: The Capital Gains Account Scheme or CGAS is a scheme that can be used to save capital gain on sale of property. The scheme is a lucrative option for people who cannot invest money in a new property before filing annual income tax returns. The scheme has a tenure of three years.
Bond investments: Capital gains tax can be saved if the money is invested in bonds within six months of the property sale date. Once the bonds are bought, the tax exemption under Section 54EC of the Income Tax Act of 1961 is valid.

Conclusion

After the sale of land or any property, capital gains tax has to be paid. However, by reinvesting the amount within a specific time period, payment of this tax can be saved. Some exemptions to this tax are provided under the Income Tax Act,1961.