The sale or transfer of property is a common way for individuals to generate profits, but with it comes a significant aspect of taxation—a capital gains tax on the sale of the property. This tax is levied on the capital gains on property generated from the sale of residential properties, land, or other capital assets. The capital gains are categorized into two types based on the holding period: Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG).
While both types are subject to different tax rates and rules, understanding their differences, calculation methods, and possible exemptions can significantly help reduce your overall tax burden. This blog aims to break down the capital gains tax on property sales, detailing how it applies to STCG and LTCG, along with the calculations involved and exemptions that might be available to you.
Short-Term Capital Gain (STCG) on the Sale of Property
When you sell a property within a short period after purchasing it, the gain from the sale is termed Short-Term Capital Gain (STCG). The duration within which the property must be sold to qualify as short-term capital gain depends on the type of asset.
STCG on Sale of Property – Holding Period and Tax Implications:
For capital gain on the sale of property, if the property is sold within 24 months of acquisition, the gain qualifies as STCG. The key factor here is the holding period—a property is considered short-term if it is held for less than 24 months. If you sell the property within this period, the gain will be classified as STCG, and the tax rate will be based on your income tax slab.
This means that the tax on selling property (STCG) will be added to your total taxable income for the year and taxed at the applicable tax slab rate. The profit earned from selling the property will be considered part of your income and taxed accordingly.
In simpler terms, if you fall in the 20% tax bracket, your capital gain tax on sale of property will be 20% of the profit generated from the sale, but it could go higher or lower based on your total taxable income.
STCG Calculation – How to Calculate Capital Gains:
The calculation of short-term capital gains involves the following steps:
- Consideration Received: The total price or consideration you receive from the sale of the property.
- Cost of Acquisition: The price at which you initially acquired the property.
- Improvement Costs: Any expenses incurred on renovating or improving the property.
- Sale Expenses: These include legal, brokerage, and registration fees incurred during the sale of the property.
To calculate the STCG, you subtract the total costs mentioned above from the sale consideration. The resulting amount is your capital gain, which will then be taxed based on the income slab rate applicable to you.
Example:
- Sale Consideration = ₹50,00,000
- Cost of Acquisition = ₹30,00,000
- Improvement Costs = ₹2,00,000
- Sale Expenses = ₹1,00,000
- STCG = ₹50,00,000 – (₹30,00,000 + ₹2,00,000 + ₹1,00,000) = ₹17,00,000
In this case, the STCG would be ₹17,00,000, and this amount would be taxed as part of your total income for the year, according to the income tax slab rates.
Long-Term Capital Gain (LTCG) on Sale of Property
When you hold a property for a longer duration and then sell it, the gain from the sale is termed Long-Term Capital Gain (LTCG). The holding period for LTCG is longer than that for STCG, and it has a different set of rules for taxation.
LTCG on Sale of Property – Holding Period and Tax Implications:
According to the Union Budget 2024, the holding period for LTCG on immovable property such as residential homes or land has been revised. For properties sold after 24 months of holding, the gain qualifies as long-term capital gain. The profit generated from selling such long-held assets is taxed at a special tax rate, which is lower than that of STCG.
The tax rate for LTCG on property is currently set at 12.5% (as per Budget 2024), which is lower than the 20% rate that was previously applicable, making it a more tax-efficient option for long-term investors.
LTCG Calculation – How to Calculate Capital Gains:
For LTCG calculations, the following factors are considered:
- Consideration Received: The total price at which you sell the property.
- Indexed Cost of Acquisition: The original cost of acquisition adjusted for inflation through the Cost Inflation Index (CII). This ensures that the impact of inflation on the property’s price is taken into account.
- Indexed Improvement Costs: Similarly, improvements made to the property are also adjusted for inflation.
- Sale Expenses: Expenses related to the sale, such as brokerage fees, registration charges, etc.
The key difference between STCG and LTCG calculations is that LTCG benefits from indexation, meaning the cost of acquisition and improvements is inflated to account for the rise in prices over time, reducing the overall taxable capital gain.
Example:
- Sale Consideration = ₹80,00,000
- Indexed Cost of Acquisition = ₹30,00,000 (adjusted for inflation)
- Indexed Improvement Costs = ₹3,00,000
- Sale Expenses = ₹1,00,000
- LTCG = ₹80,00,000 – (₹30,00,000 + ₹3,00,000 + ₹1,00,000) = ₹46,00,000
The capital gain tax on sale of property in this case would be 12.5% of ₹46,00,000. This will be lower than the tax rate for STCG, allowing long-term investors to benefit from reduced taxation.
Key Differences Between STCG and LTCG
The most significant difference between STCG and LTCG is the holding period and the resulting tax rate:
- STCG applies when the property is sold within 24 months, and the gains are taxed at the individual’s income tax slab rate.
- LTCG applies when the property is sold after 24 months, and the tax rate is set at 12.5% (without indexation) for properties sold after 23 July 2024.
Tax Exemptions on Capital Gains
To reduce the burden of capital gains tax on property, individuals can avail themselves of various exemptions, depending on how they reinvest the capital gains.
1. Section 54 – Exemption on Residential Property:
Under Section 54, if you sell a residential property and reinvest the capital gain in purchasing or constructing another residential property, you can avail of an exemption. Post-Budget 2019, you can now reinvest in up to two properties, unlike the previous rule that allowed investment in only one property.
2. Section 54F – Exemption on Non-Residential Property:
Section 54F applies if the capital gains are derived from the sale of assets other than residential properties, and the proceeds are reinvested in the purchase or construction of a residential property. The full exemption is available only if the entire sale proceeds are reinvested.
3. Section 54EC – Exemption on Investment in Bonds:
This section allows exemption if the capital gain is reinvested in specific bonds issued by NHAI or REC, with a maximum limit of ₹50 lakh. The bonds must be held for a period of 5 years to qualify for the exemption.
4. Section 54B – Exemption on Agricultural Land:
If you sell agricultural land and reinvest the capital gain in purchasing new agricultural land, you can claim an exemption under Section 54B, provided the reinvestment occurs within two years from the date of sale.
Conclusion
The capital gain tax on sale of property is an essential aspect of property transactions that individuals must factor into their planning. Understanding the difference between short-term capital gain (STCG) and long-term capital gain (LTCG), along with how to calculate them and the exemptions available, is crucial for optimizing tax liabilities.
By taking advantage of tax exemptions under various sections of the Income Tax Act, individuals can significantly reduce their capital gain tax on sale of property and maximize their returns. If you plan to sell a property, it’s important to understand how the holding period affects the tax treatment and what steps you can take to minimize your tax burden.
Whether you’re dealing with capital gains on property, capital gain tax on sale of land, or tax on selling property, informed decision-making can help you navigate the complexities of property taxation and ensure that you make the most out of your investments.
Understanding Capital Gain Tax on Property FAQs:
1. How is capital gains tax calculated on the sale of property?
(Sale Price - Cost of Transfer - Indexed Cost of Acquisition - Indexed Cost of Improvement) × Applicable Tax Rate (STCG or LTCG).
2. What is the 6-year rule for capital gains?
3. Is it mandatory to show the sale of property in ITR?
4. What is the period of holding for capital gains?
1. 12 months for listed securities; holding beyond this qualifies as long-term.
2. 24 months for properties and other assets; holdings exceeding this are considered long-term.
