When you sell a capital asset at a price higher than its cost of acquisition, you have made a capital gain. Capital gains can be made on the sale of property, stocks, mutual funds, bonds, or anything else that may classify as a capital asset. A capital asset can be either short term or long term. Capital gains attract taxes, but taxation rules-including the rate of taxation-varies from one asset class to another. Here, we will look at capital gains from the sale of property, and the measures you can take to save taxes on those gains.
SHORT TERM CAPITAL GAINS
An asset is classified as short-term or long-term depending on how long it has been held by its owner. For immovable properties, assets held for 24 months or less since the date of registration or grant of occupation certificate are considered short term. The gains from the sale of such an asset are taxed as per the income tax slab of the seller during the year of sale. For example, you purchased a residential property for `50 lakh in July 2017 and sold it in May 2019 for Rs 60 lakh. Since your ownership was less than two years, the asset is considered short term. Your short-term capital gains of Rs. 10 lakh will be taxed at your slab rate. If it’s 30 per cent, you will pay Rs 3 lakh as taxes along with applicable surcharge and cess. While calculating your acquisition cost, you can include the cost of home improvement, commission, brokerage, etc.
LONG TERM CAPITAL GAINS
Where the immovable property is held for longer than two years, it becomes a long term asset. The gains from the sale of a long term immovable property are taxed at 20.6 per cent along with indexation benefits. This is significant because by calculating the indexed cost of acquisition for your property, you can save yourself a substantial amount of tax. The indexed value is calculated basis the Cost Inflation Index updated each year by the Ministry of Finance. In the CII table, a financial year is assigned a value which rises from the previous year’s value in conjunction with the Consumer Price Index. Let’s understand the calculation with an example.
Let’s say you purchased your property for Rs 20 lakh in 2009-10 and sold it for Rs 45 lakh in 2018-19. Since the asset is long-term, you can calculate an indexed cost of acquisition for it. The formula for this is [purchase cost x (CII for the sale year/CII for the purchase year)]. In this case, the indexed cost is Rs 20 lakh x 280/148, or Rs 37.83 lakh. Therefore, your Long Term Capital Gains are Rs 45 lakh minus Rs 37.83 lakh, or Rs 7.16 lakh. On this, you will be taxed at a rate of 20.6 per cent. So your taxes will be Rs 1.47 lakh plus applicable surcharge and cess.
It is possible to save taxes on LTCG from the sale of an immovable property. Here are your options.
- Under Section 54 of the Income-Tax Act, you can reinvest your sales proceed in up to two more residential properties in India where your capital gains from the sale don’t exceed `2 crore. The reinvestment must happen within one year of, or two years from, the property sale, or three years from the sale where the new property is under construction. The new property thus constructed or purchased shouldn’t be sold for three years, else the taxes saved will need to be paid.
- If you want to delay the decision to reinvest, you can save taxes by depositing the proceeds in the Capital Gain Account Scheme (CGAS) by opening an account with any notified bank.
- You can save taxes by reinvesting your proceeds in NHAI or REC bonds. Real estate investments are one of the best ways to save taxes. You can save taxes not just through home loans and other eligible deductions but also while selling your property along with indexation benefits.
(The writer is CEO of BankBazaar.com)...