Capital Gain Tax on Sale of House Property & How to SAVE Tax?

Calculation of capital gain tax on Sale of property

If you are looking for PROVEN and fastest way to SOLVE an issue on Capital gain tax on the sale of house property & How to save tax? this post is for you.

When I personally think about the property/house and taxation, there are several questions arises.

I have tried to cover almost every related query with this article. Let’s club out the list of questions every person holds in his mind.

Basic about Levy of Capital Gain Tax on Sales of Property

At the time of Sales of property, the amount earned by the seller must be treated as income and levied a capital gain tax on the property sale.

The capital gain tax must be treated as~

  • Long term Capital Gain (LTCG)
  • Short Term Capital Gain (STCG)

When Long term capital gain applicable? – The difference of months (date of purchase and date of sales) in easy terms is more than 24 months (which is reduced from FY 2017-18 onwards from 36 months to 24 months), the scenario said to be Long term capital gain.

When Short term capital gain applicable? – The only difference is months in LTCG and STCG, In this case, if the date of purchase and date of sales is less than 24 months, the scenario said to be Short term capital gain.

Few cases, the difference between the purchase price of the asset and the amount you sell it capital loss too.

Tax Slab on capital gains tax on Sale of property in India

Long term Capital gain tax rate in India totally differs from Short Term Capital Gain Tax.

Please note that indexation benefit only applies if your asset qualifies for long term capital gains tax post indexation.

Property type

What Cost Inflation Index as far as property is concern?

In simple terms, the number of goods that the sum of money can convert is not available the next day. If 2 units of goods could be bought for Rs.100 today, tomorrow only 1 unit might be available due to increasing inflation.

Cost Inflation Index (CII) plays an important role to calculate the inflation rate.

How and why CCI important for calculating capital gain tax on Property sale.

For the calculation purpose of Long term capital gain tax, the formulae required the index value which was declared by the government of India after putting the value the exact value comes out.

How is long-term capital gains tax on sale of property calculated?

Capital gains tax India calculator is easy to understand, let’s try to simplify this calculation by understanding Capital Gain and Capital Gain Tax.

Buying a Property for Rs 35 Lakhs and Sold it for Rs 50 Lakhs, The Profit is Rs 15 Lakhs. This is not as simple as that as far as property matters and LTCG tax is concern.

Below formulae simplify and clear all your doubts regarding the calculation of capital gain tax on the property sale.

Keep Reading and find out How?

Calculate Gross Long Term Capital Gain by subtracting the index cost of purchase, expense on transfer/sell and index cost of improvement from the sale price.

How does CII calculation work

Gross Long Term Capital Gain =

“Fair Market Value or Sale Price – Expense on Transfer – Index Cost of Purchase – Index Cost of Improvement”

Index cost of Purchase = Actual cost * CII for Year of Sale/ CII for Year of Purchase

Index cost of Improvement = Cost of Improvement * CII for Year of Sale/CII for Year of Improvement

Let’s understand the whole scenario with an example:

  • Long-term capital gain= Full value consideration.
  • (-) Expenses incurred for transfer (Like Brokerage, Stamp Duty, Travelling expenses etc)
  • (-) Indexed cost of acquisition
  • (-) Indexed cost of improvement/Repairing/Maintenance
  • Finally Long term capital gain Tax

All the value must be travel through CII (Cost Inflation Index) 

Calculation of Long Term Capital Gain

Long term capital gain tax calculator in excel

How Short-term capital gains tax on Sale of property calculated?

The Only difference between the calculation of LTCG and STCG is the period of keeping your property in hand.

In this scenario, the role of cost inflation index CII is not required.
A Simple Formula:
“Fair Market Value or Sale Price – Expense on Transfer – Cost of Purchase – Cost of Improvement”
  • Fair Market Value or Sale Price = Full value consideration.
  • (-) Expenses incurred for transfer (Like Brokerage, Stamp Duty, Travelling expenses etc)
  • (-) Cost of Purchase
  • (-) Cost of Improvement
  • Finally Short term capital gain Tax

Calculation of Short Term Capital Gain

Short term capital gain calculator in excel

Section 54, 54EC, 54F: Exemption from Long Term Capital Gains Tax

Sections again!

Is it important to understand this section right now? Is it really helpful?

There are tons of questions that confuse almost every reader right now, So let’s simplify the doubts.

At the time of Sales of Property, the profit margin is huge (which is a good return) on the other hand the tax slab trim your profit by 20% LTCG tax. The Government of India provides exemptions under certain specific terms if you reinvest the amount under sections.

Three different routes to save tax on long-term capital gains

  • Section 54
  • Section 54EC
  • Section 54F

Exemption under section 54

In some cases, the house property is sold not to earn profit but to buy another house at some other locations due to some genuine reason, like Job transfer, Child Education, etc – considering this reason, Income Tax department reduces some hardness to the seller by imposing Long Term Capital Gain tax.

Section 54 gives relief to a taxpayer who sells his residential house and from the sale proceeds, he acquires another residential house.

Some required conditions:

  • Should be Individual or HUF.
  • This section is applicable only on Long term capital.
  • The taxpayer should have to acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house.
  • This exemption is excepted only for one House Property.

Exemption under section 54EC of Income tax act

Under this section If you are interested to save LTCG Tax but not interested in investing in another house due to any reason like (slowdown in the property market), section 54EC allows you to save your Tax if the capital gain amount is invested in certain specified bonds.

National Highway Authority of India, Rural Electrification Corporation, is a good example of it.

  • The maximum amount invested is Rs 50 Lakhs
  • Must invest within Six months of the transaction.
  • The Lock-in Period is 5 Years of investment.

Income Tax section 54F Exemption

This section is similar to section 54 the only difference is under section 54 capital gain arises from residential property required to can be reinvested the gain in two residential property, should construct a residential house within a period of three years from the date of transfer of the old house.

And under Section 54F the capital gain arises from any assets such as gold, stocks or even mutual funds other than residential property must be reinvested in the last one year or two years from the date of transfer of old property, three years in case seller wants to construct a house.

  • Assessee is an Individual or HUF.
  • Capital Gain arises from the sale of any capital asset other than Residential House.
  • This exemption is excepted only for one House Property.

Save tax on long term capital gain

Short Term Capital Gain Exemption

All property transactions attract short term capital gains tax, provided property transfer happens within 2 years of ownership/purchase. Selling inherited property is also bound to attract. Short term capital gains and one is inclined to pay the tax on it.

Individuals who wish to claim deductions/exemptions on short term capital gains can do so under Sections 80C to 80U of the Income Tax.

Gift Tax on Immovable property in India

According to section 56(2)(v) gift tax in India, any gift received in the hands of recipient above Rs 50,000 is taxable. In case of receipt of Immovable Property, if the stamp duty value exceeds Rs 50,000 the whole amount is taxable according to the tax slab.

Point to Remember: Gifted Property is also known as inherited Property.

Exemption:

If the recipient receives immovable property under certain specified condition from relative like (marriage gift, under a will or by way of inheritance, or in contemplation of death of payer, etc.) The property is exempted by Law.

Relative: Spouse, brother or sister, brother or sister of the spouse, brother or sister of either of the parents.

Point to Remember: What is ancestral property? Ancestral property is a property acquired by your grandfather which has been passed down from generation to generation up to the present generation (you) without being divided or partitioned by the family.

Which ITR Form required to disclose gifted property

The Taxpayer required to file ITR 2 or ITR 3 for disclosure of taxable movable/immovable properties received as gifts during the year, the reason is ITR 1 & ITR 4 does not specifically require disclosure for taxable gifts.

Where to show gifts in ITR?

In case Even if the Sale of gifted Property is taxable (in other words Property gift received from a relative which are not exempted) you have to show the income under “Income from Other sources“.

However, if you get a property through a registered gift deed or by will, you can show the value of the gift received as ‘Exempted Income‘ in ITR form just to avoid future correspondence with the Income-tax department.

Tax on sale of Inherited Property

There is a confusion among a lot of people on sales of Inherited Property, Some people think that inherited/gifted house is exempted (which is True), and some think that it’s not.

In reality, there is no tax liability at the incidence of inheritance of house property, but If the inherited/gifted house is sold that property falls under taxable as capital gains.

New Question arises

What would be the Purchase cost of the house while calculating capital gain Tax on Inherited Property?

The property did not cost anything to the inheritor, but for calculation of capital gain, the cost to the previous owner is considered as the cost of acquisition (Purchase Cost) of the property. The rest of the value needs not required to find out.

Let’s Understand with Example

Mr. Anuj Received an inherited Property from his father on 05 August 2007, which was initially purchased by his father on 12 December 1993 for Rs 25 Lakhs. Now on dated 03 July 2018, Anuj decided to sell the property for Rs 82 Lakhs.

The cost for calculating Anuj capital gain shall be Rs 25 lakh and the cost shall be indexed since it’s a long-term capital gain.

Download Long/Short term capital gain tax calculator in excel for Inherited Property

Section 50C: Property Transaction below the Circle Rate

In Indian culture, almost every Property transaction is huge in amount and every involver (seller or buyer) required to save tax using their black money (cash amount) to buy the property and the seller also require to sell some stack of their property in Cash.

Under this whole process, the Government is the only party suffers.

Section 50C is introduced in Budget 2013 to wipe out and control this kind of a transaction with certain conditions.
Point to Remember: Stamp duty Value/Circle Rate/Reckoner Rate/Guidance Value all are same.

Treatment of Income-tax on such transaction below stamp duty value

Stamp duty is valued by the state government depending upon the area and certain specified conditions, the transaction value of the property is above stamp duty value but in some minor case, it must be below duty.

We have seen transaction executed below stamp duty value with 20% amount with cheque and balance with Cash, with these kind of transaction the whole 80% amount for both buyer and seller turn to be black money, the buyer use to do it because of the unpaid income tax on such cash amount lying with him, the seller take it for future such transaction for himself.

Under Section 50C if the property sold below circle rate/ stamp duty rate it was assumed that the price as per circle rate during the calculation of capital gain tax.

If Mr. X sold his house at Rs 40 lakhs and the stamp duty value is Rs 75 lakhs, Mr. X levied a capital gain tax on Rs 75 Lakhs. 

However, in some cases, the genuine price of the deal is below stamp duty due to location or some other condition the buyer request the Income-tax assessee officer to evaluate the fair price.

Section 56 (2): Tax Treatment for the Buyer

Section 56(2), tighten up hands of buyer too If the buyer purchases the property below circle rate he is also liable to calculate the tax under stamp duty rates.

The difference amount comes under income from other sources for the buyer.

This way both are liable to pay tax if transaction executed below stamp duty, The only purpose of the introduction of his section is to discourage these kinds of transactions of the Government to make every transaction transparent.

Tax on Property below circle rate

Tax on Sale of Under Construction Property

Calculation of Capital gains tax under sales of under-construction property raised a very important question in every body-mind “whether it has to be calculated from the date on which the property was booked (or) agreement has been done (or) date of registration (if any) or its possession date.

In the above scenario, the date of purchase is considered because all the formalities like agreement, possession, registration all are completed.

It is easy to calculate but as far as under-construction property is concern there are several ways to discuss.

Currently the major of house property holders use to sell their property before registry, so what would be the calculation scenario of Capital gain tax?

How is Holding Period calculated on Sale of an Under-Construction Property?

There are few scenarios every person aware off i.e. (1) date on which the property was booked/Allotted (2) agreement has been done (3) date of registration (if any) and (4) it’s possession date.

Let’s take an Example (Date Wise) (Event Wise) for clear picture:

Under-Construction Property

Scenario A

Let’s say you have booked a house property by paying the required down-payment or initial booking amount on 01 March 2013, on the same day you have received the allotment letter from the builder. The agreement is executed with the builder on 15 August 2013. The Property is under construction and you have decided to resale your under-construction property on 11 September 2019.

In this case, as soon as you pay the booking amount the builder issue allotment letter, in that case, the holding period is considered and can be calculated from the Date of Allotment of property.

So as per the above example, the duration is (2019-2013) which comes to be Long Term Capital Gain (LTCG).

There can be instances where the builder can clearly state in the Allotment letter that it does not confer you any ownership right. In such circumstances, the date of the Agreement can be considered for holding-period calculation.

Scenario B

You have booked a house property by paying the required down-payment or initial booking amount on 01 March 2013, on the same day you have received the allotment letter from the builder. The agreement is executed with the builder on 15 August 2013, You have paid all your installment according to the payment plan.

The builder issued you the possession letter/certificate of the property, Now you have decided to resell your property. The re-sale executed on 11 September 2019.

Under this scenario, ‘Date of possession’ is considered for holding period calculation then your capital gains fall under Short term capital gains and you have to pay taxes based on your income tax slab rate.

Another prospect is you can consider ‘Date of allotment‘ for calculation of holding period and your capital gains can then become Long Term Capital gains, as your holding period is more than 2 years.

Scenario C

You have booked a house property by paying the required down-payment or initial booking amount on 01 March 2013, on the same day you have received the allotment letter from the builder. The agreement is executed with the builder on 15 August 2013, You have paid all your installment according to the payment plan.

The registration in your name is also done and the builder issued you the possession letter/certificate of the property, Now you have decided to resell your property. The re-sale executed on 11 September 2019.

Under this scenario, you can consider ‘Date of Registration’ for holding period, some saw you can use the possession date for the calculation holding period.

Which ITR form to fill for capital gains

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gain tax on property sale are required to file ITR-2, The requirements regarding capital gains in ITR-2 are extensive and depend upon the type of asset sold and period of holding.

Even if your Capital Gain is exempted you have to disclose mentioning the details under Schedule EI.

Calculation of capital gain tax on Sale of property

Download Income Tax on SALE of Property calculator

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