Capital Gains Tax: Rules on Property Sales

Key Takeaways

• Capital gains tax applies to profits from selling assets like real estate, gold, or shares.

• The tax rate depends on whether the gain is classified as short-term (STCG) or long-term (LTCG), based on the holding period.

• STCG on property (held for less than 24 months) is taxed at the seller’s income tax slab rate.

• LTCG on property (held for more than 24 months) is taxed at 20% with indexation or 12.5% without indexation.

A capital gain is the profit made on selling capital assets, like real estate, stock, or gold. Knowing about it can be of help because this gain is subject to capital gains tax. Understanding the difference between short-term and long-term capital gains, as well as the most current modifications to tax legislation, is essential when addressing capital gains tax on property sales in India.

The tax applied to the capital gain is what is referred to as a capital gains tax, and the tax applied is dependent on the type of capital gain. There are two types of capital gains as per India’s tax rules, one is short-term capital gains and the other is long-term capital gains.

If you sell the asset within a short period (usually less than 24 months for property and gold, and less than 12 months for shares), the profit is considered a short-term capital gain (STCG). It is taxed according to the individual's income tax slab rates.

However, if you hold the asset for a longer period (more than 24 months for property and gold, and more than 12 months for shares), the profit is considered a long-term capital gain. It is taxed at the rate of 20% with indexation.

To calculate tax on sale of personal property, you need to know the sale price, purchase price, and any expenses incurred during the sale.

Short-term Capital Gains is calculated as the sale price minus the Purchase Price, Improvement Costs, and Sale Expenses combined. 

In case of Long-term Capital Gains, it is calculated with one difference, as the Sale Price minus the Indexed Purchase Price, Improvement Costs, and the Sale Expenses combined.

The tax rates for short-term and long-term capital gains differ significantly:

• Short-term Capital Gains: These are taxed at the individual's income tax slab rates. For example, if you're in the 30% tax bracket, your short-term gains will be taxed at 30%.

• Long-term Capital Gains: These are taxed at a lower rate. For property and gold, the rate is 20% with indexation benefits (which adjusts the purchase price for inflation). 

The Union Budget 2024 introduced several changes to the capital gains tax structure:

• The holding period for gold and gold-related investments (like gold ETFs and mutual funds) has been reduced from 36 months to 24 months to qualify for long-term capital gains tax.

• A significant change has occurred regarding the taxation of long-term capital gains. For sales on or before July 22, 2024, long term capital gains were taxed at 20% with indexation benefits.

• For sales after July 23, 2024, the tax rate for long term capital gains is 12.5% without indexation benefits. There is also an option for those who purchased property before July 23, 2024, to utilise the 20% tax rate with indexation. This provides flexibility, allowing you to choose the option that minimises your tax liability. It is very important to run calculations for both options to see which option is most beneficial for you.

• Indexation adjusts the purchase price of the property for inflation, which can reduce the taxable capital gains. As stated above, this benefit is no longer available for properties sold after July 23, 2024.

• The tax structure for gold-related investments has been simplified, making it easier for investors to understand and comply with the tax laws.

• The government has introduced measures to promote gold investments, such as reduced import duty and no short-term capital gains tax on gold ETFs and mutual funds.

There are several exemptions and deductions available to reduce your personal property capital gains tax liability.

• Section 54: This section allows you to claim an exemption if you reinvest the LTCG from the sale of a residential property into another residential property.

• Section 54F: This section applies when you sell any long-term capital asset, other than a residential property, and reinvest the net sale consideration into a residential property.

• Section 54EC: This section allows you to claim an exemption if you invest the LTCG in specified bonds within 6 months, such as those issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC).

When availing tax exemption on capital gains on the sale of a property, you need to keep the following in mind:

• Detailed Records: Maintaining meticulous records is paramount. This includes:

  • Purchase deeds

  • Sale agreements

  • Receipts for improvements

  • Brokerage receipts

  • Any other relevant financial documents

• Understanding the Cost Inflation Index (CII):

  • The CII is used to adjust the purchase price of an asset for inflation. This helps to reduce the taxable capital gains. The government releases the CII annually.

  • You use the CII of the year of purchase and the year of sale to calculate the indexed cost of acquisition. As previously stated, this is something that has changed, and is something that needs to be considered based upon the date of sale.

• Tax Planning Strategies: Consider the timing of your property sale to optimise your tax liability. For example, delaying a sale to cross the 24-month holding period can change the gains from short-term to long-term.

• Tax Loss Harvesting: If you have capital losses from other investments (e.g., stocks), you may be able to offset them against capital gains from the property sale.

• Inherited Property: When selling inherited property, the cost of acquisition is generally considered to be the cost incurred by the previous owner. The holding period includes the period for which the previous owner held the property.

• Non-Resident Indians (NRIs): NRIs are also subject to capital gains tax on the sale of property in India and the same rules and regulations generally apply.

Navigating the complexities of capital gains tax on property sales can be challenging, but understanding the basics can help you make better financial decisions. Whether you're selling property, shares or gold, knowing the tax implications and planning accordingly can save you money and ensure compliance with tax laws.

Under Section 2(14) of the income tax act, personal vehicles are not treated as capital assets so they are not subject to capital gains tax.

Capital gain tax is applicable on the sale of jewelry or gold. If you have held it for more than 2 years, then it will be considered as long term and a tax of 12.5% will be applicable without indexation. For short-term capital gains, individuals' slab rate will be applicable.

Yes, tax deductions are available under Sections 54, 54F and 54EC of the Income Tax Act depending on the nature of the gain and its handling.

All capital assets such as property, gold, shares, financial investments, etc., which give capital gains are subject to capital gains tax.

Yes, you can avoid a capital gains tax by claiming an exemption under Sections 54, 54F or 54EC depending on the nature of the sale and the reinvestment of the proceeds.

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