Short Term and Long Term Capital Gain Tax

The value that results from the selling of a capital asset is capital income. Income is characterised as the benefit received from the selling of a capital asset. The capital gain is either short term or long term, depending on the capital asset’s retention duration.

When there is a selling contract, the capital gain is triggered; however, the capital gain is not triggered when land is inherited. House lands, properties, houses, trademarks, patents, automobiles, leasehold rights, jewels, and equipment are all forms of capital assets for capital gain.

Property held for 2 years or more to qualify as a long term asset

Tax Treatment Holding Period Criteria FY2017-18 Onwards Holding Period Criteria Upto FY2016-17 Tax Rate
Short terms capital gains Less than 2 years after registry or issue of OC, whichever is later Less than 3 years after registry or issue of OC, whichever is later Marginal tax rate – (up to 30%), 3% cess and up to 15% surcharge
Long Term Capital Gains 2 years or more 3 years or more 20% with indexation benefit and 10% without indexation benefits. Exemptions are available if proceeds invested in residential house or Section 54EC bonds. Indexation benchmark changed to 2001 from 1981-82 effective 2017-18

Capital Gain Tax on the sale of property

Are you the proprietor of a property?

Looking forward to selling your old land? If you sell your house for more than it cost you when you bought it, you’ll have to pay capital gains tax on the benefit you make.

E.g., if you purchased a house 20 years ago and try to sell it now, it can be anticipated that your buying value would be highly valued. This shows that you have gained “Capital Gains” on your property and are also responsible for paying tax on these gains. The amount at which your capital gains will be taxable depends on the tenure for which the property is owned and will be graded as a short-term capital gain or long-term capital gain accordingly.

Short Term Capital Gain TaxCapital Gain Tax on Property

A gain from selling a property that you have owned for fewer than 24 months is a short-term Capital Gain Tax. As a taxpayer, you would pay tax on short-term capital gains on real estate depending on the marginal income tax limit. Here are a few key points to bear in mind:

  • You can change or reduce your selling consideration to account for any brokerage or commission fees you charged at the time of the property sale.
  • Any maintenance and home renovation costs paid during the time you held/owned the asset are deductible.
  • Indexation income, i.e. inflation adjustment, is not permissible on a property deal listed under short-term capital gain.
  • There is no exemption or benefit on short-term capital gains tax u/s 54, i.e. by reinvesting inland or owning a RECL or NHAI capital gains bond Obligation under Short-Term Capital Gains will be substantial if you fall into a higher income tax bracket.
  • It is prudent to plan to sell the property after 2 years of ownership to transfer it to the long-term capital gains band.

Short Term Capital Gain Tax Calculator

Illustration of Short Term Capital Gain Tax: 

Mr A sold his property for Rs.50 lakhs in January 2016, after purchasing it for Rs.30 lakhs in December 2014. Mr A slips into the largest tax slab of 30 per cent, as per his wages. During the time, Mr A spent about 2 Lakh on house improvement and paid a brokerage of 0.5 per cent of the house’s sale price when selling the house. What are his taxable capital gains, and what is the amount of tax he is paying?

The gain earned on this property in its 2-year retention period will be regarded as a short-term capital gain in this example and will be charged as a short-term capital gains tax by the applicable income tax slab. Mr A’s short-term capital gains will be Rs.17.75 lakh in this scenario, and he will owe a tax of Rs.5,32,500 on it, as seen below.

Particulars Amount In Rupees
The sale price of the house 50,00,000
Less: Any transfer expenses such as brokerage, commission etc 25,000
Net Sale Consideration 49,75,000
Less: Purchase Price of the house 30,00,000
Less: House improvement costs 2,00,000
Gross Short Term Capital Gain 17,75,000
Less: Any exemptions available under sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G Nil
Net Short Term Capital Gain 17,75,000
Short Term Capital Gain Tax Liability for Mr A (at his marginal tax rate slab of 30%) 5,32,500

Long Term Capital Gain Tax

Any benefit resulting from selling a property that you have owned for more than three years would be called long term capital gain. The discrepancy between the net revenue consideration and the indexed cost of land is used to measure long-term Capital Gain Tax. The advantage of indexation is that it helps you exclude the effect of inflation from the gains on land transactions such that only the real gains are taxed. This is based on the logic that the worth of money is continuously declining due to inflation. Therefore it is unjust to charge a long-term property holder merely because of inflation for the nominal profits that accrue to him.

Main items to recall:

  • The current tax limit on long-term capital gains is 20%.
  • You can change your selling consideration to account for any brokerage or commission fees you charged at the time of the property sale.
  • You are entitled to exclude all renovation and home maintenance expense accrued during the time you held the asset. Any house improvement spending is also authorised to be calculated according to the Cost Inflation Index issued by the Reserve Bank of India, equivalent to the indexation gain applicable at the selling price.
  • By investing the benefit in residential property or purchasing bonds issued by RECL or NHAI, you will get your long-term capital gains tax reduced/exempted.

Cost Inflation Index and its Impact on Capital Gain Tax

Inflation allows the worth of currency to depreciate over time. In India, however, the income tax department requires the property’s cost price to be indexed to adjust it for the inflation-related price appreciation. In each financial year, the Reserve Bank of India updates the cost-inflation index. The Cost Inflation Index has been tracked since 1981-82 (Base Year = 100) in the table below.

Financial Year Cost Inflation Index
2018-19 280
2017-18 272
2016-17 264
2015-16 254
2014-15 240
2013-14 220
2012-13 200
2011-12 184
2010-11 167
2009-10 148
2008-09 137
2007-08 129
2006-07 122
2005-06 117
2004-05 113
2003-04 109
2002-03 105
2001-02 100

Long term Capital Gain Tax Calculator

Illustration: 

In January 2016, Mr A sold his property at Rs.50 Lakh, which he had bought at  Rs.30,00,000 in December 2011. Mr A’s salary places him in the 30 per cent marginal tax bracket. In January 2013, Mr A spent about 2 Lakh on home improvement and paid a brokerage of 0.5 per cent of the property’s sale price when selling the house. What are his taxable capital gains, and what is the amount of tax he is paying?

Since the buyer in the above case owned the property for more than two years, the benefit gained from its sale would be called a long-term capital gain. The long-term capital gain would be subject to a 20% tax limit.

Mr A will be responsible for this land sale to pay a levy of Rs.1,18,007 on his Long Term Capital Gain Tax of Rs.5,90,034.

In the table below, the estimation of the long-term Capital Gain Tax with indexation benefits is explained:

Particulars Amount In Rupees
The sale price of the house 50,00,000
Less: Any transfer expenses such as brokerage, commission etc 25,000
Net Sale Consideration 49,75,000
Less: Indexed acquisition cost of the house (Purchase Price in FY12 adjusted to FY16 Cost Index) i.e. ₹ 30 Lakh * Cost Index of FY16 (254)/Cost Index of FY12 (184) 41,41,304
Less: Indexed house improvement costs ( Home Improvement Expenditure in FY13 adjusted to FY16 Cost Index) i.e. ₹ 2 Lakh * Cost Index of FY16 (254)/Cost Index of FY12 (200) 2,54,000
Gross Long Term Capital Gain 5,79,696

How to save tax on long term Capital Gain Tax?

A property is a life-long wealth created and usually sold to amplify your current wealth, which justifies levying a tax on it. Capital gains tax also explicitly impacts investment motives. However, the Indian income tax act 1961 has rules that exclude taxpayers from paying long-term capital gains tax under some cases.

1. Under section 54, sell a residential property and invest the gains to buy a new residential property and claim an exemption on Capital Gain Tax.

In compliance with section 54, if you invest all or part of the residential property’s purchase proceeds in India in another residential property in India, you can claim an exemption from capital gains tax. The exemption laws are as follows:

  • The exception applies to persons and HUFs and is valid for one residential house.
  • It is possible to set the capital gains from selling a rental property against the purchase of a new residential home. In India, the land sold and acquired should be
  • A new residential house can be acquired one year before selling the existing house or two years after the previous home sale. If you intend to build a home, the house building should be finished within 3 years of the date of the previous property’s auction.
  • You will not sell it in less than 3 years until you have bought or designed new home. If you sell it before the three-year mark, you will forfeit the capital gain allowance, and the proceeds will be taxable. These three years are determined from the new house’s purchase or completion of the operation.
  • The exemption claim value is smaller than the expense of the new house bought or the amount of the capital gains.

2. Under section 54 F, sell any asset other than a residential property and claim capital gains tax exemption by purchasing a residential house

The below are the rules for Section 54 F exemption:

  • Exemption available to citizens and HUFs
  • A new residential house can be acquired one year before selling the existing house or two years after the previous home sale. In the case of a building, the house’s construction must be finished within three years of the selling of the previous estate.
  • The exemption is applicable only if, on the date of sale of those properties, the taxpayer does not own more than one residential property other than the one acquired for deduction according to Section 54 F F. If the full sale consideration is not expended in the purchase of new property and only a part of the sale consideration is invested, the amount of exemption would be proportionately given, i.e. Sum Exempt= Capital Benefit X Consideration of Amount Invested/Net Selling

3. Under Section 54 EC, sell a long term capital asset and get capital gains tax exemption by investing in 54EC Capital Gain Tax Bonds

This section is beneficial for taxpayers who have sold their properties and are entitled to pay long-term capital gains tax. Still, they cannot take advantage of the provisions under section 54 when acquiring another residential land. By spending their earnings on Capital Gain Tax bonds, these taxpayers will save money. The exemption laws are as follows:

  • Within six months of selling your house, you must invest the “money raised” cash in these bonds
  • TDS is not available to funds invested in capital bonds, so it is excluded from capital benefits tax. Income revenue from capital gains bonds, however, is taxable.
  • The term is 5 years on capital gains bonds, and the withdrawal is immediate. After 5 years, you will not earn any interest.
  • Your funds deposited in Capital Gain Tax Bonds can not be extracted until 5 years after the date of the purchase.
  • The face value of the bond is 10,000, and you must spend a minimum of 20,000 in these bonds, the maximum amount that has occurred during the year in which the asset is converted from the transfer of one or more properties and can not surpass 50 Lakhh in the following financial year.
  • Currently, these bonds are issued by REC and NHAII.
  • These bonds are usable in both Demat and physical form.
  • Such bonds should not be pledged as collateral to receive loans.

4. Park your Capital Gain Tax amount in capital gains account in case you are unable to purchase a property before your Income Tax filing date

The Capital Gain Tax account framework is available as a temporary means of saving the tax on capital gains. This service is about those who are reluctant to buy a new house until paying their taxes. The law was adopted in 1988 and, under the scheme, only specified banks or institutions might open a capital gains account. In this account, the taxpayer will position his benefit for three years on his asset purchase. He will withdraw the money he put in to purchase or build his new home as long as he chooses to do so over the next three years. The scheme’s specifications are as follows:

  • The taxpayer should state it, in his Income Tax Return Form, he has opted for the scheme
  • You will deposit instalments or in one lump sum at some time before the deadline for filing the income tax return.
  • In this arrangement, two forms of accounts will be opened. One budget helps you borrow cash according to your desires, and another one is like a fixed deposit.
  • To apply for capital gains relief, money borrowed from any portfolio must be spent within two months for a particular reason.
  • The sum invested in this account will not be used as a mortgage on another debt.
  • The interest on the portfolio for capital gains is taxable. As per the rules, TDS will be deducted.

5. Set off your Capital Gain Tax against any capital loss carried forward from previous years

India’s Income Tax Act requires a taxpayer to set his capital gains against those losses, thereby minimising his tax burden if he has such capital losses that he has suffered previously and carried forward. Some key points that should be noted are:

  • Short-term Capital Gain Tax can be set against short-term capital losses, and long-term capital gains can only be set against long-term capital losses.
  • A capital loss will be rolled on for a further eight years.
  • The carried-forward capital loss should have been reported on income tax returns.

FAQs for Capital Gain Tax on Property

How do I avoid Capital Gain Tax on the property?

Some of the ways through which you can avoid Capital Gain Tax on the property are:

  • You can claim an exemption under Section 54F by purchasing or constructing new residential property from your previous house’s sale proceeds.
  • You can choose to invest in capital gain bonds. If you invest your entire sale proceeds, then no capital gain tax would be applicable.
  • Another option is that you can invest in the Capital Gain Account Scheme. It is a scheme that lets you park your money temporarily while you hunt for the right property for yourself to invest in.

How is Capital Gain Tax calculated on the sale of a property?

The long term capital gain tax is calculated by multiplying the tax rate of 20% with the capital gain amount. On the other hand, short-term capital gain tax on the property is taxed by including the short term capital gain under the individual’s total income and taxed based on the applicable slab rate. Visit Dialabank for further details.

What is capital gains tax in India on property sale?

The long term Capital Gain Tax rate is 20% for property sale. At the same time, the short term capital gain is taxed as per the applicable slab rate.

How can I save capital gains on my property?

You can save capital gain on your property by investing in another property. Under section 54, you can invest in up to two properties; before budget 2019, the benefit was available only for one. Secondly, you can also invest the sale proceeds into constructing another property as per section 54F.

What are the rules regarding exemption of Capital Gain Tax?

Three popular rules regarding the exemption of Capital Gain Tax are:

  • Section 54, in which the investment is made in buying a new property.
  • Section 54F, in which the investment can be made on buying new property or construction of another property.
  • Section 54EC, in which the Capital Gain Tax amount is invested in some specified bonds. These are also called Capital Gain Tax bonds.

Where should I invest my money after selling my house?

The best place to invest your money after selling your house would be another property. This can be your new house, or you can rent it to generate regular income as well.

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