How To Calculate Capital Gains Tax On Real Estate Investments?

• When you sell property at a profit, the gain is taxable as capital gains

• Short-term capital gains (STCG) apply if it is sold within 24 months while long-term capital gains (LTCG) apply if held for more than 24 months and then sold 

• STCG is taxed at the applicable income tax slab rate while LTCG is taxed at 20% with indexation or 12.5% without indexation or at 20% with indexation

Selling real estate can be a significant financial transaction, often resulting in substantial profits. However, these profits, known as capital gains, are subject to taxation. Understanding the nuances of capital gains tax on real estate sales in India is crucial for optimising your tax liabilities. This guide aims to simplify the complexities of real estate capital gains tax and provide strategies to save on long-term capital gains (LTCG) tax.

Capital gains tax is the tax levied on the profit earned from the sale of a 'capital asset.' In India, capital assets include land, buildings, machinery, trademarks, shares and jewellery, among others. The tax is applicable in the year the asset is transferred. 

When you sell a property, either residential or commercial, at a price higher than its purchase cost, the profit earned is considered a capital gain. This gain is taxable under the Income Tax Act. The tax applies to residential properties or lands sold by individuals for whom such income is not their primary source of earning.

The capital gains on real estate are classified into short-term and long-term depending on the holding period of the property. If the property is sold within 24 months of acquisition, the profit is classified as short term capital gain. If it is sold after holding it for more than 24 months, the profit is classified as a long term capital gain.

There is no difference in the tax rates applied on capital gains from real estate sales depending on whether it is residential real estate or commercial real estate. The capital gains tax on selling a house is the same as on selling a shop. 

However, the tax rates for capital gains on property sales vary based on the type of gain. While short-term gains are taxed at the applicable income tax slab rate, long-term gains are taxed at 20% with indexation or 12.5% without indexation for sales after July 23rd, 2024.

Tax exemptions are primarily available for long-term capital gains. Short-term gains are added to the total income and taxed at the applicable slab rates.

Under the old tax regime, residents or non-residents below 60 years are exempt from paying capital gains tax if their total income is under ₹2.5 lakh. For those aged 60-80 years, the exemption limit is ₹3 lakh. However, under the new tax regime residents or non-residents are exempt from paying capital gains tax if their total income is under ₹4 lakh.

Investors can avail of tax exemptions under various sections of the Income Tax Act, depending on the type of reinvestment:

• Section 54 provides an exemption for long-term capital gains arising from the sale of a residential house. To qualify, the new house must be purchased 1 year before or 2 years after the sale, or constructed within 3 years. The exemption is capped at ₹10 crore and applies to up to two houses in India.

• Section 54F offers an exemption for investing the net proceeds from the sale of any long-term asset (other than a residential property) in a new residential property. The taxpayer must not own more than one house (excluding the new one) at the time of sale.

• Section 54EC provides an exemption for investing in specified bonds within 6 months of the sale.

• Section 54B applies to capital gains from the sale of agricultural land outside rural areas. The exemption is available if the proceeds are reinvested in agricultural land within 2 years.

Take a look at the table below to understand these sections at a glance:

This scheme was introduced by the Government of India to help taxpayers save on capital gains tax and encourage them to reinvest the sum. Under this scheme, taxpayers can deposit the proceeds from the sale of certain assets into designated accounts maintained with authorised banks or financial institutions. The deposited amount must be invested within specified timelines to maintain the exemption.

It’s very simple to calculate the CGT on the sale of property. For assessing the short-term capital gains, the transfer expenses, cost of acquisition and the cost of improvement of the property is deducted from the total sale price. 

However, in case of long-term capital gains, the transfer expenses, indexed cost of acquisition and indexed cost of improvement is deducted from the total sale price.

Capital losses can be offset against capital gains to reduce tax liability. Long-term Capital Loss (LTCL) can be offset against long term capital gains only and carried forward for up to 8 years. 

Short-term Capital Loss (STCL) can be offset against both short term and long term capital gains and carried forward for up to 8 years. To carry forward losses, filing an Income Tax Return (ITR) is mandatory.

Navigating the complexities of real estate capital gains tax can be challenging. However, understanding the tax implications and available exemptions can help you optimise your tax liabilities. 

Whether you are dealing with short-term or long-term capital gains, it is essential to plan your investments and reinvestments strategically to maximise tax benefits. Consulting with tax experts can further ensure a seamless and efficient tax filing experience.

1. What is the difference between short-term and long-term capital gains tax on real estate?

The main differentiating factor between STCG and LTCG on real estate is the holding period. You must sell the STCG within 1 year of purchase whereas you must hold the asset for more than 1 year in LTCG.

2. How do I calculate capital gains tax for residential properties?

To calculate capital gains tax for residential properties, subtract the cost of property acquisition along with the cost of improvement from the selling price. You can also deduct any other expenses or exemption for taxable capital gains.

3. Are there tax exemptions available for commercial property sales?

Yes. Tax exemptions are available for commercial property sales usually with a lock-in period of 5 years under the Section 54 EC. However, the exemption must be made within 6 months of the property sale and the maximum exemption is capped at ₹50 lakh.

4. What is indexation and how does it impact capital gains tax?

Indexation is the method to adjust the purchase price of an asset to reduce taxes on long-term capital gains. This is done to reflect the impact of inflation on it where higher purchase means lower tax. 

5. How is the sale price determined for capital gains tax purposes?

For capital gains tax purposes, the sale price is determined when cost of acquisition, expenses incurred during purchase and cost of improvement are subtracted from sale consideration. 

6. What are the common deductions allowed for real estate capital gains?

Some common deductions allowed for real estate capital gains include purchase of new plant/property, acquisition of construction building, shifting and transfer of old assets to new undertaking areas and other specified expenses. 

7. Can I avoid capital gains tax by reinvesting in property?

Yes. You can avoid capital gains tax by reinvesting in a new property but this deal has to be made within 2 years from the sale date for agricultural land. However, this tax will be made applicable if the purchased land is sold within 3 years of purchase.

Return to Goal