Capital Gains Tax on Sale of Property in India in 2023

Capital Gains Tax on Sale of Property in India is levied depending on the duration for which the property was held by the seller. If the property was held for less than 2 years – it would be classified as a Short Term Capital gain and if the property was held by the Seller for more than 2 years, it would be classified as a Long Term Capital Gain.

Capital Gain Tax Rate on Sale of Property

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:-

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

In case the property has been held for more than 2 years, it would be classified as a Long Term Capital Gain. The following are the main benefits of classifying as a Long Term Capital Gain:-

1. Flat rate of 20% Capital Gains Tax
2. The benefit of Indexation can also be claimed
3. Various tax exemptions under Section 54, Section 54EC, Section 54F can also be claimed

The manner of computing Taxable Long Term Capital Gains on Sale of Property are as follows:-

Other Relevant Points regarding Capital Gains

1. Advance Tax is required to be paid during the year on the capital gains arising on sale of the property irrespective of whether it is Long Term Capital Gain or Short Term Capital Gain.
2. In case a Short Term Capital Loss arises on the sale of a property, the short term capital loss can be set-off against both Short Term and Long Term Capital Gain arising in that year. However, if the loss is Long Term in nature, it can only be set-off with Long Term Capital Gains of that Financial Year and not with Short Term Capital Loss. 
3. 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. 

TDS on Sale of Property

Irrespective of whether it is a Long Term Capital Gain on Short Term Capital Gain, TDS is applicable. TDS stands for Tax Deducted at source and is a deduction made by the buyer while  making the payment to the seller. After deducting TDS, the balance payment is made by the buyer to the seller.

TDS is not a new form of tax but a form of tax which is paid in advance and can be adjusted with the final tax liability computed at the end of the year while filing the income tax return. The rate of TDS depends on whether the seller is a NRI or a Resident and is explained below:-

1. Seller is Resident: 1% TDS would be deducted if the Property Value is more than 50 Lakhs. (Refer: 1% TDS on Sale of Property)
2. Seller is Non-Resident: 20% TDS would be deducted irrespective of property value. Cess and Surcharge would also be applicable over and above this 20%. (Refer: TDS on Sale of Property by NRI)

Meaning of Terms mentioned above

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 provided the deduction for interest has not been claimed earlier.[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

• Recommended Read: Computation of Capital Gains using Cost Inflation Index

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. 147 from this link – Purchase e-Book on Capital Gains Tax