Understanding CGT on Sale of Property

Delve into the complexities of Capital Gains Tax (CGT) on property sales, including types, calculations, exemptions, and deductions. Learn how to make informed decisions and explore financing options like Bajaj Finserv Loan Against Property.
Loan Against Property
APPLY
5 min
29 April 2024

Selling property isn't just about the transaction; it's about understanding the tax implications that come with it. Capital Gains Tax (CGT) can significantly impact the financial outcomes of property sales, making it crucial for sellers to grasp its intricacies. Let's delve deeper into the nuances of CGT, exploring its types, calculations, exemptions, and deductions.

What is Capital Gains Tax on Property?

CGT is a tax levied on the profit earned from selling a property that has appreciated in value since its purchase. This tax applies to various types of properties, including residential homes, commercial buildings, land, and even inherited properties.

Types of capital gains on property

In property transactions, capital gains are categorized into short-term capital gains (STCG) and long-term capital gains (LTCG), each with its distinct tax implications.

  • Short-term Capital Gains (STCG): Arise from property sales within three years of acquisition, taxed at regular income tax slab rates.
  • Long-term Capital Gains (LTCG): Occur when property is held for more than three years before sale, taxed at a flat rate of 20% with indexation benefits.

Calculation of capital gains tax

The computation of CGT involves a specific formula, enabling taxpayers to determine their tax liability accurately.

Capital gain = Selling price − (purchase price + improvement costs + transfer costs)

How to calculate the short-term capital gain?

To calculate the short-term capital gain (STCG) on the sale of property in India, follow these steps:

  1. Determine sale price: Identify the full value of consideration received from the sale of the property.
  2. Subtract acquisition cost: Deduct the original cost of acquisition of the property.
  3. Deduct improvement costs: Subtract any expenses incurred for improvements on the property.
  4. Subtract transfer costs: Deduct expenses related to the transfer, such as legal fees and brokerage.

The formula is:

STCG = Sale Price - (Acquisition Cost + Improvement Costs + Transfer Costs)

Exemptions and deductions

To mitigate CGT liability, taxpayers can leverage exemptions and deductions:

  • Indexation benefit: Long-term capital gains are adjusted for inflation using the Cost Inflation Index (CII), resulting in a lower taxable amount.
  • Exemption under Section 54: Individuals can claim exemption from long-term CGT if the proceeds are reinvested in purchasing or constructing another residential property within a specified period.
  • Exemption under Section 54F: This exemption applies to long-term capital gains from the sale of any asset other than a residential house. The proceeds must be reinvested in purchasing a residential property within the prescribed time frame.
  • Exemption for agricultural land: Capital gains arising from the sale of agricultural land in rural areas are entirely exempt from tax.

Tax implications on sale of land vs. other property

Distinct tax implications apply to land sales compared to other property types:

  • Sale of land: Typically considered a long-term capital asset if held for over three years, taxed at 20% with indexation benefits.
  • Other property: Residential and commercial properties share similar tax implications as land, with variations in indexation benefits based on type and usage.

As you embark on your property journey, consider leveraging the untapped potential of your property with Bajaj Finserv Loan Against Property. Whether you are aiming to expand your business horizons, secure your child's educational future, embark on home renovations, or address any other financial need, our solution offers a seamless pathway to unlocking your property's equity.

Advantages of Bajaj Finserv Loan Against Property:

  1. High loan amount: Loans up to Rs. 10.50 crore* against property.
  2. Simple eligibility: Clear loan application process with transparent eligibility criteria.
  3. Competitive interest rates: Low rates of interest for economical borrowing.
  4. Quick approval: Expedited application with minimal paperwork and approval within 72 hours* in most cases.
  5. Flexible tenure: Benefit from an extended repayment tenure of up to 15 years*.
  6. Balance transfer facility: Transfer existing loan against property with minimal paperwork and improved terms.

Explore the possibilities with loan against property and harness the potential of your property assets for a better financial future.

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Frequently asked questions

How do you calculate capital gains tax on sale of property?
Capital gains tax on property sale is calculated by deducting the property's purchase price and associated costs (like improvements and transfer expenses) from the selling price. The resulting profit is subject to tax at either short-term or long-term capital gains rates.
How do you calculate capital gains tax on sale of property?
Capital gains tax on property sale is computed by subtracting the property's purchase price and associated costs (like improvements and transfer expenses) from the selling price. The resulting profit is subject to tax at either short-term or long-term capital gains rates.
How much capital gain is tax free on property?
The amount of capital gain tax-free on property varies based on exemptions. For example, under Section 54 of the Income Tax Act, if the sale proceeds are reinvested in another residential property within the stipulated time, the entire capital gain can be exempted.
Is the sale of a house property exempt from capital gains?
The sale of a house property can be exempt from capital gains tax under certain conditions. For instance, if the proceeds are reinvested in another residential property within the prescribed time frame, exemptions under Section 54 of the Income Tax Act can apply.
How are the long-term capital gains calculated in case an immovable property is sold?

Long-term capital gains on the sale of immovable property are calculated by deducting the purchase price and improvement cost from the net sale price. For long-term capital gains, the property should have been held for more than 24 months. The purchase price and improvement costs can be adjusted with the cost inflation index to provide relief for inflation. The resultant capital gain is then taxed at the rate of 20% after providing for certain deductions under sections 54, 54EC, 54F etc. of the Income-tax Act, 1961.

How much capital gains are tax-free?

According to current laws, if you sell a residential property after two years of owning it, the profits made from the sale are eligible for tax exemptions under Section 54 of the Indian Income-tax Act. However, this is subject to the conditions that the gain should be reinvested in buying or constructing up to 2 new house properties India within a specified time. Furthermore, this benefit can only be claimed once in a lifetime when the capital gains do not exceed INR 2 crores.

Do senior citizens have to pay capital gains tax in India?

Yes, senior citizens in India are subject to capital gains tax. However, the rate and means of calculation remains the same as for any other resident individual. For instance, long-term capital gains on the sale of a property owned for more than 2 years are taxed at the rate of 20% after adjusting for cost inflation index. Various provisions such as those under sections 54, 54EC, 54F etc. of the Income-tax Act can be utilised by senior citizens as well to save their capital gains tax.

Show More Show Less

Related videos