No matter how popular mutual funds and stocks go on to become in our country, owning property is still considered a key milestone by many generations. That is why many people still prefer to have some form of real estate, be it a plot or property in their portfolio.
More often than not, people aim to benefit from the property by renting it out for regular income or selling it at a higher price. However, while the gains/profits in the case of the latter seem to be lucrative, it’s equally important to understand the tax implications that are associated with it.
Profit or gain arising from the sale of assets such as property, gold, jewellery or shares is called a capital gain. Capital Gains are divided into two categories:
If you sell a property after holding it for more than 2 years, then the profit arising on the sale will be termed as LTCG, and will be taxed at the rate of 20% (20.8% with indexation).
If you sell a property after holding it for less than 2 years, then the profit arising on sale will be termed as STCG, and will be taxed as per your income tax slab rate.
Short-term capital gains are taxed as per the income tax slab rates applicable to you. For instance, if the short-term capital gain is Rs 6 lakh and the person falls in the 30% tax bracket, then he/she has to pay 31.20% on Rs 6 lakh, i.e. Rs 1,87,200. Gain/loss from the sale of the asset is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale from the sale proceeds of the asset, as per Cleartax.
Short Term Capital Gain = Sale Consideration – Cost of acquisition- Cost of improvement (if any) – Expenses incurred exclusively for the sale of the Asset.
Long-term capital gains are taxed at the rate of 20.8% (rate including health and education cess @ 4%) with indexation. Indexation is basically a technique to adjust the cost of the asset according to the inflation index. It will increase your cost and reduce your gains and thereby, tax liability. So under long-term capital asset, the benefit of indexation is available plus the person who falls in the tax bracket of 30% also gets the advantage of paying the lower tax rate of 20%. Long-term capital gains are calculated in the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and indexed cost of the improvement.
Long Term Capital Gain = Sale consideration –Indexed cost of acquisition- Indexed cost of improvement (if any)-Expenses incurred exclusively for the sale of the Asset-Exemption u/s 54, 54F, 54EC if any availed.
The calculation of Indexed cost can be done with the help of the following formula:
Indexed Cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year of sale / CII of the year in which the property was first held or FY 2001-2002, whichever is later
Note: As per Cleartax, if the property was acquired before 1st April 2001, in that case, the actual cost of the property or the FMV of the property as of April 1, 2001, as opted by the taxpayer, should be deemed to be the cost of acquisition.
Indexed Cost of Improvement=Cost of improvement * CII of the year or sale / CII of the year in which improvement took place
© 2018 CA Chandan Agarwal. All rights reserved.