Capital Gains Tax on the Sale of Property

When someone sells a property that can’t be moved, like an apartment, they get money. Depending on when the sale takes place, there may be tax consequences for the money that is made. When you sell a capital asset, like a house, the money you get from the sale is called a “capital gain.” On this gain, you have to pay a tax called the capital gains tax. 

It’s important to remember that not all of the money you get from selling a property is taxed. Instead, only the profit that a person makes from selling a piece of property is taxed.

First, let’s talk about the two kinds of capital gains:

Gains on short-term investments: A short-term capital asset is an asset that the owner keeps for less than two years. In our case, these are things like land and buildings that can’t be moved. If you sell a property less than two years after the date it was bought (which is written on the registered sale deed), the money you make is considered a short-term capital gain.

These capital gains are added to your taxable income and taxed based on your income tax bracket. There are no ways to avoid paying tax on these gains, so if you want to avoid short-term capital gains tax, you should hold on to your property for at least two years before selling it.

Long-term gains on investments: When you sell a home more than two years after you bought it, the money you make is called a “long-term capital gain.” At a rate of 20%, these gains would be taxed. The main benefit of owning a property for more than two years before selling it is that indexation will work in your favor.

It is important to note that the three-year holding period for immovable properties was changed to a two-year holding period starting with the 2017-2018 financial year. So, the gain from selling a property that has been owned for more than two years will only be considered long-term capital gain if the property was sold after March 31, 2017. 

Capital gains are calculated by taking the purchase price (the price you paid for a property when you first bought it) away from the sale price (the price at which you are selling the property). But if you’ve owned an asset for a long time, like a house, you can’t just subtract the purchase price from the sale price to figure out how much you’ve made without taking inflation into account. Because of this, the idea of “indexation” is used.

The indexed price changes the purchase price to take inflation into account. Most of the time, the indexed price is higher than the original price. This lowers the long-term capital gains and the Long-Term Capital Gains Tax that needs to be paid (LTCG Tax).

So, to figure out long-term capital gains, you take the indexed purchase price or the indexed cost of acquisition away from the sale price. This is why indexation only works for assets that have been owned for more than two years. 

To understand how LTCG Tax is worked out, we need to look at the different parts that go into it:

Note that the capital gains are taxed in the year of the transfer, even if the payment has not been received.

• Indexed acquisition cost: The indexed cost of property acquisition is the price you paid for the property after adjusting for inflation using the Cost Inflation Index (CII), which is released by the Ministry of Finance every year. (The illustration that follows explains how indexation works.) 
• Cost of improvement based on the index: These are the costs you incurred to add to or change the property you are now selling. For example, you may have upgraded the flooring material or put in a modular kitchen, among other similar costs. This price is also changed to account for inflation.
• Associated costs: These are costs that are only and solely related to the transfer of property. For example, the commission paid to the broker, stamp duty fees, and travel costs are all associated costs. If you inherited the property, you might be able to get reimbursed for some of the costs of going through the inheritance and Will process. 

Short Term Capital Gain = Final Sale Price – (Cost of Acquisition + Home Improvement Cost+ Cost of Transfer) 

Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where: 

Disclaimer: The opinions shown above are mainly for informational reasons and are based on market research. Deal Acres is not responsible for any actions made as a result of relying on the provided material and makes no representations as to its accuracy, completeness, or reliability.