Computation of Short Term & Long Term Capital Gain Tax on Property

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At the time of Sale of any Real Estate Property, Tax is liable to be paid on the Gains earned on the sale of the Real Estate Property. Such Gains could either be Short Term Capital Gains or Long Term Capital Gains. The basis of such Classification in the Income Tax Return has been given below:-

  1. Short Term Capital Gain (STCG): If the Real Estate Property is held for less than 24 Months
  2. Long Term Capital Gain (LTCG): If the Real Estate Property is held for more than 24 Months (Reduced from 36 to 24 Months from FY 2017-18 onwards)

Capital Gain Tax Rate on Sale of Property

Particulars Tax Rate
Short Term Capital Gain Tax Rate As per normal Income Tax Slabs
Long Term Capital Gain Tax Rate 20%

Computation of Short Term Capital Gains on Sale of Property

Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:-

  Full Value of Consideration    xxx
(Less)   Expenditure incurred wholly and exclusively in connection with such Transfer/Sale    xxx
(Less)   Cost of Acquisition    xxx
(Less)   Cost of Improvement    xxx
  Gross Short Term Capital Gain    xxx
 (Less)  Exemption (if any) available u/s 54B/54D/54G/54GA    xxx
                   Net Short Term Capital Gain on Sale of Property    xxx

Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above.

Computation of Long Term Capital Gain

Gains at the time of sale of Long Term Capital Asset shall be computed in the following manner:-

  Full Value of Consideration    xxx
(Less)   Expenditure incurred wholly and exclusively in connection with such Transfer/Sale    xxx
(Less)   Indexed Cost of Acquisition    xxx
(Less)   Indexed Cost of Improvement    xxx
  Gross LTCG    xxx
 (Less)  Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G    xxx
                   Net Long Term Capital Gain on Sale of Property    xxx

 

Tax @ 20% shall be payable on the Long Term Capital Gain computed above and Advance Tax shall also be liable to be paid on such Capital Gain.

In case a loss arises on the sale of a property, the capital loss can be set-off against other Capital Gains in that year. If the Loss cannot be set-off against capital gain in that year, it can be carried forward for the next 8 years and set-off in the future years. However, loss can only be carried forward if the return was filed before the due date.

long-term-capital-gain

The meaning of the terms mentioned above in the computation of Long Term Capital Gains and Short Term Capital Gains have been explained below

Full Value of Consideration

Full Value of Consideration means what the transferor receives or is entitled to receive as consideration for the Sale of Property /Asset. This Value may be in cash or in kind i.e. in exchange for an Asset.

In case of exchange of an asset, the full value for the computation of Capital Gains shall be the Fair Market Value of the Property (Asset) granted in exchange. Fair Market Value in relation to Capital Gains means the price which the Property (Asset) would normally fetch if sold in the open market on the Relevant Date.

In case, the full value of consideration is received in installments in different years, the entire value of consideration shall be the Market Value of the Property/Asset granted in exchange.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp Duty, Registration Fees, and Legal Expenses etc. However, any expense which has been claimed as a deduction under any other provision of the Income Tax Act cannot be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it:-

  1. On the Distribution of Assets/ Total Partition of HUF
  2. Under a Gift or Will
  3. By Succession, Inheritance or Devolution
  4. On Distribution of Assets on Liquidation of a Company

Where the cost for which the previous owner of the capital asset acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value of the asset on the date on which the asset became the property of the previous owner. The Interest on money borrowed for acquiring the capital asset will also form a part of the cost of Asset [CIT v Mithlesh Kumari (1973) 92 ITR 9 (Del)]

Cost of Improvement

All Capital Expenditures incurred in making any additions or alterations to the Capital Asset by the Assessee after it became his property or alterations to the capital asset by the assessee after it became his property shall be deductible as the Cost of Improvement. If the Asset was transferred to the assessee under the cases specified immediately above, the capital expenditure incurred by the previous owner shall also be treated as cost of improvement.

However, the Cost of Improvement does not include any capital asset which is deductible in computing the chargeable under head- “Income from House Property”, “Profits or Gains of Business or Profession”, or “Income from Other Sources”. Only the Capital Expenses are considered as a cost of Improvement and routine expenses on Repairs and Maintenance do not form part of cost of improvement.

For the purpose of Computation of Long Term Capital Gain, Indexation using the Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement for the purpose of computation of LTCG

Indexed Cost     =             Actual Cost *      Cost Inflation Index of the Year of Sale

                                                               Cost Inflation Index of the Year of Purchase

e-Book on Capital Gains Tax on Sale of Property

The value of transactions in Real Estate is usually very high as a result of which the amount to be paid as Tax is also very high. Therefore proper care should be taken while computing the Capital Gains Tax applicable.

Moreover, there are several legal ways to reduce this Capital Gains Tax through proper tax planning as the Govt allows for Several Exemptions on Tax on sale of Property.

To help people to plan and legally reduce their taxes, we have authored a detailed e-book which explains everything on Capital Gains Tax on Real Estate transactions in simple words with Examples and case laws. The book can be purchased through this link.

The main topics covered in the e-book are:-

  1. Computation of Capital Gains
  2. Tax on sale of Inherited Property
  3. Tax on sale of Under-Construction Property
  4. Sale of Property below Circle Rate/ Stamp Valuation Rate
  5. How to reduce Tax by claiming Capital Gain Exemptions
  6. TDS on sale of Property
  7. 40+ Comprehensive Examples

More than 10,000 copies of this e-book have already been sold and you can also purchase the same for Rs. 93 from this link – Purchase e-Book on Capital Gains Tax

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.