Capital Gains Tax on Property

Many people own assets in the form of property. It is significant to take into account the applicable capital gains tax on the sale or transfer of such property.

Capital Gains Tax on Property for STCG and LTCG

Capital gains can be defined as profits or gains generated from the sale or transfer of any capital assets. These capital assets are further defined as any property – movable or immovable, tangible or intangible – that is legally owned by an individual.

Few examples of capital assets are residential properties, equity shares, equity-oriented funds, automobiles, land plots, buildings, gold, etc. Any profit generated out of the sale of these assets falls under the category of capital gains and is taxed under the income head “Capital Gains.”

In case your primary mode of income resides in selling and purchasing capital assets, profits from the same will be considered under the head “Income from business or profession.”

Capital gain tax on the property is levied specifically on the monetary profit from the sale or transfer of residential properties or lands by an individual who does not consider it a profession or such income is not his/her main domain of earning.

Long-Term Capital Gain and Short-Term Capital Gain

Capital assets are classified into two types based on their holding period by the seller – long-term capital assets and short-term capital assets.

Capital gains from the respective capital assets fall under that specific category of gains – long-term capital gain or short-term capital gain.

As per the Union Budget 2024, the following amendments are effective from FY 24-25 - 

• For dividing assets into long term and short term, there will only be 2 holding periods: 12 months and 24 months. Note, the 36-month holding period has been removed.
• For all listed securities, the holding period is 12 months.
• All listed securities with a holding period more than 12 months are considered Long-Term.
• The holding period for all other assets is 24 months. Therefore, an immovable property that is held for more than 12 months will be termed as long-term.
• STCG on the sale of the property will continue to attract tax at income slab rates.
• The taxation on LTCG on other financial and non-financial assets is reduced from 20% to 12.5%.
• The indexation benefit that previously was available on the sale of long-term assets has now been eliminated. Hence, the sale of property made from 23 July 2024 will attract a tax rate of 12.5% only (without the indexation benefit).

Capital gain tax on property is taxed differently across these two types.

The tax rate on long-term and short-term capital gains can be described as follows –

Calculation of Short-Term Capital Gain

To calculate a short-term capital gain, you should consider the following factors –

• Consideration received, or full value consideration received in exchange for the sale/transfer of property.
• The cost of acquiring the respective property.
• The cost of any improvements or alterations or renovations made to the respective property.
• Expenses pertinent to the sale or transfer of the respective property.

Calculation of Long-Term Capital Gain

These are the following factors considered to calculate long-term capital gain –

• Full consideration is received upon the sale or transfer of property.
• Indexed cost of acquiring the respective property.
• Indexed cost of improvements or renovations or alterations made to the respective property.
• Expenses in the course of executing the sale or transfer.
• Tax exemptions.

In the case of long-term capital gains, the cost of acquisition and cost of alteration is indexed to adjust against inflation. Cost indexation is done for the benefit of the assets concerning capital gain tax on sale of property, because otherwise, the profit would be inflated, incurring more tax. Such indexation number is also called the Cost Inflation index (CII).

Capital Gain Tax on Property: Exemptions

An individual can avail of any of the four exemptions depending on the kind of reinvestment he/she does post receiving the amount of consideration from such long-term capital gain. The following sections under which tax exemptions would be available are – 54, 54B, 54F, 54EC.

• Tax Exemption under Section 54

An individual needs to meet the following criteria before availing an exemption under this section –

1. After Budget 2019, exemption on capital gain tax on property 2019 is allowed to individuals who have reinvested the capital gain in a maximum of two housing properties. If no such reinvestment takes place, then an exemption is not available. Before Budget 2019, an individual could only invest in a maximum of one housing property.
2. Only the amount of capital gain is allowed for reinvestment and not the entire sales consideration amount.
3. The total return from the capital gain should not exceed Rs. 2 Crore.
4. The investment should be made one year before the sale has taken place or two years after it.
5. This exemption is available to an individual only once.
6. An individual can invest the capital gain in a construction project as well; however, such construction should be over within 3 years from the date of sale to avail exemption.
7. Any exemption will be revoked if the new property is sold within 3 years of purchasing it.

• Tax Exemption under Section 54F

To avail exemption on capital gain tax on property in India, these following parameters should be considered –

1. The respective capital gain must be from the sale of long-term capital assets other than a housing property.
2. The entire amount received as consideration from the sale of such assets must be reinvested in a maximum of two housing properties post Budget 2019.
3. Any investment of this nature needs to occur before 1 year of sale or after 2 years.
4. Investment can be made in a construction project as well, which needs to be completed within 3 years from the date of sale.

To avail this exemption under capital gain tax on property on the entire amount of capital gain, an individual needs to reinvest the whole amount received as consideration. In case he/she fails to achieve this, then exemption on capital gain is calculated on the basis of the amount invested. The following calculation takes place in that situation –

Exempted amount = (Capital Gains * cost of new house)/ net consideration amount

• Tax Exemption under Section 54EC

Exemption on capital gain tax on property is available to an individual upon meeting the following conditions –

1. Capital gain generated from the sale of a housing property needs to be reinvested in specific bonds provided by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
2. The amount of investment cannot exceed Rs. 50 Lakh.
3. The investment amount can be redeemed by an individual after 5 years from the date of sale. This revised time frame was introduced in the Financial Year 2018-19, before which the period was 3 years.
4. The investment needs to take place before filing tax for that respective year or within six months from the date of sale.

In case the individual is unable to invest before filing tax for that year, he/she can deposit the amount in a PSU bank or any other bank listed under the Capital Gains Account Scheme (1988). In that case, exemption on capital gain tax on the sale of property will be considered legitimate. However, such a deposit needs to be converted to an investment within 2 years from the date of sale, failing which it will be considered a short-term capital gain in the year of period lapse.

• Tax Exemption under Section 54B

This exemption is only available on capital gains from a sale of land for an agricultural purpose outside of a rural area.

A rural area can be described as –

The following conditions should be met to avail exemption on capital gain tax on property in India –

1. The capital gain needs to be reinvested in a new agricultural land within 2 years from the date of sale.
2. The exemption will be revoked if the newly purchased land is sold within 3 years of purchase.
3. The investment needs to take place before tax filing in the same financial year to avail exemption.

In case there is a delay in investment, the individual can deposit the same amount in the bank for the exemptions as a long-term capital gain. The investment needs to take place within 2 years or else it will be accounted as short-term capital gain in the year of the expiry of the same.

An individual depending on his/her use of capital gain can determine their capital gain tax on property. It will help them quantify the entire taxable amount for that year.