Understanding Capital Gain Taxation on Property Sale in India

Short-term Capital Gains:

Short-term capital gains (STCG) arise when a property is held for less than 24 months. The profits made from the sale are added to the individual’s total income and taxed according to their applicable slab rates. It’s important to note that expenses related to the property’s transfer, like brokerage and registration fees, can be deducted from the overall gains.

Long-term Capital Gains:

Properties held for 24 months or more qualify for long-term capital gains (LTCG). The tax implications for LTCG differ significantly. As per the current regulations, the LTCG tax rate is 20% with indexation benefits. Indexation considers inflation over the holding period, reducing the taxable gains.

Calculation of Capital Gains:

The formula for calculating capital gains is straightforward:

Capital Gains=Selling Price−(Cost of Acquisition+Cost of Improvement+Transfer Expenses)

Cost of Acquisition: The original purchase price of the property.

Cost of Improvement: Expenses incurred for enhancing the property’s value, which includes construction costs, renovations, and additions.

Transfer Expenses: Costs associated with the property’s sale, such as brokerage and legal fees.

Exemptions and Deductions:

Certain exemptions and deductions can minimize the impact of capital gains tax:

Section 54: Under this section, if the capital gains from the sale of a residential property are reinvested in another residential property within two years (or constructed within three years), the tax on gains is exempted.

Section 54EC: Individuals can invest in specified bonds within six months of property sale to avail exemption under this section. The maximum exemption allowed is up to ₹50 lakhs.

Section 54F: If the property sold is not a residential property, the gains can be exempted by investing in another residential property. The conditions include not owning more than one residential house before the investment.