Looking to sell your property? Know more about Capital Gains Tax and Exemptions!

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

If buying a property requires proper due-diligence to avoid unwanted hassles at a later stage, selling a property requires you to focus on Capital Gains Tax and Exemptions.

Under the Income Tax Act of 1961, Sections 45 to 55A deals with Capital Gains.

Capital Gains Tax are categorized as:

• Short term Capital Gains (Holding period - 36 months or less)
• A short-term capital gains/loss will be treated and taxed in the same manner as any other income/loss.
• Short-term Capital Gains from Property sale are included in the investor's income and are taxed as per the slab rate.

• Long term Capital Gains (Holding period - more than 36 months)

Long-term Capital Gains is computed as below:
LTCG = Full value of consideration received or accruing - (indexed cost of acquisition + indexed cost of improvement + cost of transfer + Expenditure incurred wholly and exclusively in connection with such a transfer)

Long-term capital gains are taxed at a flat rate of 20 per cent for individuals and foreign companies, and 20 per cent for domestic companies.

An example of Long Term Capital Gains Tax on Property in India:

Cost of purchasing a property in November 2008 - Rs 50 Lacs

Cost of selling the property in August 2013 - Rs 1 Crore

Inflation Index for fiscal year 2008-2009 – 582 and for fiscal year 2013-2014 - 939 (see from the attached cost inflation index chart*)

Purchase Cost after adjusting for indexation – 50 Lacs x (939/582) = Rs 80.67 Lacs

Long Term Capital Gains = 1 Crore – 80.67 Lacs = Rs 19.33 Lacs

Tax on Long Term Capital Gains = Rs 19.33 Lacs x 20% = Rs 3,86,597.90

Education Cess = 386597.90 x 3% = Rs 11597.94

Total Tax on Long Term Capital Gains = Rs 3,98,195.90


Tax exemption on Long-term Capital Gains under the following conditions:

• If the sale relates to a property other than one residential accommodation and is reinvested in any residential property within a period of one year before or two years after the date of transfer.
• Alternatively, such re-investment may also be in construction of a residential house within three years after the date of transfer to be eligible for claiming this benefit.
• The house so purchased or constructed should not be transferred again within three years after the purchase or construction. Quantum of exemption will be the amount invested in the new property or the long-term capital gains, whichever is less. 

Or

If only the capital gains (and not the total sale proceeds) is invested for a period of three years in specific Bonds of National Highways Authority of India or Rural Electrification Corporation Limited or bonds redeemable after three years issued by National Housing Bank or Small Industries Development Bank of India or NABARD, as may be specified by the Government from time to time (Section 54 EC) within a period of six months from the date of transfer of the asset.

Quantum of deduction:

If the amount of capital gains is equal to or less than the cost of the new house, the entire capital gains shall be exempt.
If the amount of the capital gains is greater than the cost of the new house, then the cost of the new house shall be allowed as an exemption.

* Cost Inflation Index chart for calculations of Long Term Capital Gains Tax in India

Cost inflation index for calculations of capital gains tax in india from Green Realtech Projects Pvt. Ltd


However, Budget 2014 has altered the definition of Capital Gains Exemption. If you own a property such as ancestral home or a bigger home, and if you sell it and buy more than one smaller apartment, then, in that case, you will be exempted from Capital Gains tax on the first apartment and you are liable to pay capital gains tax on second or third apartment.

As an example, let’s say, you own a property worth Rupees 2 crores in July 2014. And you want to sell it to buy 3 smaller apartments.
Assuming, the cost of buying this property in May 2003 was Rupees 20 Lacs.
Inflation Index for fiscal year 2003-2004 – 463 and for fiscal year 2013-2014 - 939 (see from the attached cost inflation index chart*)
Purchase Cost after adjusting for indexation – 20 Lacs x (939/463) = Rs 40.56 Lacs
Long Term Capital Gains = 2 Crore – 40.56 Lacs = Rs 1.59 crore

However, if you wish to purchase 3 apartments of 65 lacs each, then, according to Budget 2014, capital gains tax exemptions will be applicable only for one residential apartment.

In other words, your Long term capital gains will be = 2 Crore – 40.56 Lacs – 65 Lacs = 94.44 Lacs
And long term Capital Gains tax will be = 94.44 Lacs x 20% = Rs. 18.89 Lacs

However, after selling your property, you invest the amount in one bigger property worth Rupees 2 crores or more, then, you will be exempted from Capital Gains.

Until this Budget, anyone in India selling immovable property, or other long-term assets and using the money to purchase a residential house within three years of the sale was not required to pay capital gains tax (20 per cent) on the sale proceeds.

But the Finance Minister has now tweaked this section to specify that only “one residential house in India” would be eligible for the tax break, instead of “a residential house”.

Source: National Housing Bank

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