Understanding Capital Gains Tax on Property

Capital gain is the profit that is earned over an asset that has increased in value over the time it was held. When tax is levied on this profit i.e. capital gain, it is known as capital gains tax. Precious metals, stocks, bonds, property and real estate are the assets on which people make capital gain. Hence, capital gains tax is levied on them. In this article, our focus will be on the capital gains tax on property.

 

Table of Contents

• Assets Levied With Capital Gains Tax
• Assets That Are Not Considered as Capital Assets
• Types of Capital Gains Tax
• Capital Gains Tax on Property
• Calculation of Capital Gains Tax on Property
• Exemption on Capital Gains Tax

Assets Levied With Capital Gains Tax

Capital gains tax is levied on capital assets. These are the assets that are used for business operations, personal use and investment purposes. When the selling price of a capital asset is more than its cost price, the difference between the price is the capital gain. This capital gain is subjected to capital gains tax. 

• Real Estate: This includes land, buildings, and houses. Both commercial and residential properties are considered capital assets.
• Investments: Stocks, bonds, mutual funds, and other financial instruments held for investment purposes fall into this category.
• Business Equipment: Machinery, vehicles, computers, office furniture, and tools used in the operation of a business are capital assets for the business.
• Intellectual Property: This includes patents, copyrights, trademarks, and trade secrets. These intangible assets are considered capital assets due to their potential to generate future income.
• Personal Property: High-value personal items like art, jewellery, collectables, and personal vehicles can be classified as capital assets. 
• Precious Metals: Investments in silver, platinum, gold, and other precious metals.
• Foreign Currency Transactions: Profits from foreign currency trading or holdings.
• Business Property: Assets used in a business, like equipment or vehicles.
• Collectables: Art, coins, antiques, and other collectable items sold.
• Cryptocurrencies: Profits from the sale of cryptocurrencies like Bitcoin or Ethereum.

Assets That Are Not Considered as Capital Assets

The following assets are not classified as capital assets. Due to this, these cannot be levied with capital gains tax. Instead, these assets are taxed differently. Here is the list of the assets that are not considered as capital assets:

• Agricultural land in rural(*) India
• Special bearer bonds (1991)
• Personal goods such as clothes and furniture held for personal use
• Any stock, consumables or raw material that is used for business or professional purposes.
• Following bonds issued by the central government:
• 6½% gold bonds (1977) 
• 7% gold bonds (1980) 
• National Defence gold bonds (1980) 
•  Gold deposit bond issued as per gold deposit scheme (1999) 
• Deposit certificates issued under the Gold Monetisation Scheme, 2015

Types of Capital Gains Tax

Mainly, there are two types of capital gains. Short-term capital gains (STCG) and Long-term capital gains (LTCG). Let us learn about these two in detail.

Short-term Capital Gains Tax (STCG)

Such capital gains tax is levied on the sale of any asset held for one year or less. However, short-term capital gains are taxed at the same rate as ordinary income. These are the gains added to your other income for the year and are taxed according to your income bracket. Short-term capital gains are reported on your income tax return along with other income. These are less beneficial in comparison to long-term investments since these do not receive any special tax treatment.

Long-Term Capital Gains Tax (LTCG)

Long-term Capital Gains Tax (LTCG) is levied on the profits from the sale of long-term capital assets. These held for more than one year before being sold. The key aspects of long-term capital gains tax include its preferential tax rates, which are generally lower than the rates for short-term capital gains and ordinary income, as well as its impact on investment strategies.

Capital Gains Tax on Property

Capital gains tax on the sale of property is levied in two ways. When a housing property is sold after holding it for less than 24 months, then it is considered a short-term capital gain on the property. In case a housing property is sold after holding it for 24 months or more, then it is considered long-term capital gains on property. Before AY 2018-19, the time period was 36 years. Let us understand how capital gains tax on property works with the help of two examples.

• A man named Mr Rawat bought a piece of land in April 2015 and sold it in December 2023. This means that the property has been held for more than 24 months. In this case, it is liable for long-term capital gains tax since it is a long-term capital asset.
• Another person Mr Kumar purchased a property in May 2022 and sold it in December 2023. In this case, the property is held for less than 24 months. Hence, it is liable for short-term capital gains tax since it is a short-term capital asset.

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Calculation of Capital Gains Tax on Property

Capital gains tax on immovable property is calculated for both short-term and long-term capital gains.

1. Short-Term Capital Gains Tax on Property

S.No.	Details	Amount
a	Full value of consideration (sales consideration of asset)	50,00,000/-
b	Less: Expenditure incurred exclusively through the transfer of capital assets (including commission, brokerage, and advertisement expenses)	1,00,000/-
c	Net sale consideration [(a) - (b)]	49,00,000/-
d	Less: Cost of acquisition	20,00,000/-
e	Less: Cost of improvement	50,000/-
f	Short-Term Capital Gains [(c)-(d)-(e)]	28,50,000/-

Here:

1. Full Value of Consideration (Sales Consideration of Asset)
   

This is the total amount received from the sale of the asset. It includes everything the seller receives in exchange for the asset, which could be cash, the market value of other property received, or any assumed liabilities by the buyer.

2. Less: Expenditure Incurred Through Transfer of Capital Asset

These are expenses directly related to the sale of the asset. They can include:

• Commission and Brokerage Fees: Payments to brokers or agents for facilitating the sale.
• Advertisement Expenses: Costs incurred for advertising the sale of the asset.
• Legal Fees: Legal expenses directly related to the sale process.
• Transfer Fees: Any charges related to legally transferring the asset to the new owner.
  

3. Net Sale Consideration
   

This is calculated by subtracting the above-mentioned expenses from the full sale value. It represents the actual amount the seller receives from the transaction.

4. Less: Cost of Acquisition

This is the original purchase price of the asset. In the context of short-term capital gains, the cost of acquisition is the amount paid to acquire the asset, not adjusted for inflation.

5. Less: Cost of Improvement

These are expenses incurred to improve the asset, which subsequently increases its value. Examples include renovation costs for property or significant upgrades to equipment. For short-term capital gains, only improvements made after the asset's purchase and before its sale are considered.

2. Long-Term Capital Gains Tax on Property

S.No.	Details	Amount
a	Full value of consideration (sales consideration of asset)	50,00,000/-
b	Less: Expenditure incurred exclusively through the transfer of capital asset (including commission, brokerage, advertisement expenses)	1,00,000/-
c	Net sale consideration [(a) - (b)]	49,00,000/-
d	Less: Indexed(*) cost of acquisition [assuming that property was purchased in FY 2014-15 for Rs. 30,00,000]	42,00,000/-
e	Less: Indexed cost of improvement if any [assuming that cost of improvement in FY 2019-29 was Rs. 3,60,000]	4,20,000/-

*Indexation means adjusting value against the rise in the value of an asset due to inflation. Indexation is only possible for long-term capital assets.

For more information on the calculation, click here

Exemption on Capital Gains Tax

In India, there are several tax exemptions and benefits available under the Income Tax Act for capital gains. Some of the key exemptions include:

Exemption Under Section 54 on Sale of a Residential Property

• If you sell a residential property and use the proceeds to buy another residential property, the capital gains can be exempt.
• The new property must be purchased either one year before the sale or two years after the sale of the old property. Alternatively, it can be constructed within three years of the sale.

Exemption on Sale of House Property for Investment in a Startup (Section 54GB)

• Capital gains from the sale of residential property are exempt if the proceeds are used to subscribe to the equity shares of an eligible startup.
• Certain conditions apply, including holding the shares for at least five years.

Exemption for First-Time Home Buyers (Section 54EE)

• Capital gains arising from the sale of any asset can be exempt if the amount is invested in residential property.
• This is applicable for first-time homebuyers and subject to certain conditions.