Capital Gains (CG) Tax on Property in India: How to Calculate?

long term CG | facts | short term CG | facts | reinvestment of long term gain | facts | formula to calculate

Before you sell your property, you should know how to calculate capital gains (CG) tax on property in India. There are two types of capital gains: short-term and long-term. The former is subject to a 20% tax on long-term capital gains.

You should be sure to reinvest your long-term gains. And should not exceed the amount you are allowed to sell the property for. Listed below are the rules and requirements for both types.

Capital Gains Tax: Long-term capital gain

Long-term capital gains are taxable gains from the sale of an asset. These types of gains are usually held for longer periods and are subject to inflation. To calculate long-term capital gains, you should know the date of purchase and sale of your investment and its cost.

The difference between purchase and sale price should be entered, along with the time between the purchase and sale date. For non-residents, the capital gain tax rate is 10%, while residents pay 20%.

You can use the capital gain tax calculator to estimate your LTCG tax. Whether you’re planning to buy another house or construct a new one, it’s important to understand how LTCG works.

The rules vary depending on the type of property you’re selling. But generally speaking, the new property must be purchased or constructed within 3 years of the old one. Moreover, you cannot sell the new house until you’ve held it for 3 years.

The amount of capital gain that you can claim as a tax deduction is proportional to the amount invested in the property and the price paid for it. The time period that is relevant to this capital gain deduction is the same as that of residential property.

However, you should keep in mind that capital gains tax on property in India will become taxable. This happens when you purchase another house in the same timeframe.

Facts about Long-Term Gains

To avoid paying the capital gain tax you must sell your old home within two years of its purchase. If you sell your home and buy a new one, you can use your entire gain in the purchase of another home.

However, you should note that it is not easy to find a consistently performing company. So you should buy another one within two years of your previous sale.

The amount of the capital gain that you received must be deducted from your income tax return. This is applicable when buying a property. However, you can claim a tax exemption for some assets if you invest in certain bonds and wait for the period of investment to pass.

This capital gain tax exemption is not applicable for any property acquired after the year 2000. Therefore, if you sell your property within three years, you should invest in these bonds. This will help you avoid the capital gain tax.

The amount you invest in these bonds should be at least Rs. 50 lakh per year.

When calculating long-term capital gains you should keep in mind that your indexed cost of purchase must be less than the cost of the asset’s value.

You can determine this by taking the purchase price and deducting all expenses. Applicable solely for the sale of the asset. However, you should note that the purchase price is not included in the sale price. This is because it is deducted when computing the LTCG.

Capital Gains Tax: Short-term capital gain

When you sell your property, you should know the rules and regulations regarding capital gains tax. Short-term capital gains are not deductible from the capital gain tax. You should invest any money that you gain in bonds within six months.

In addition, you must hold the bonds for at least three years. In addition, you should invest the money in residential property, not in commercial property. This is because long-term capital gains are deductible from capital gains tax.

In order to determine the short-term capital gain tax on property in the Indian tax system, you need to consider the following factors: the amount of gain, whether it is reinvested or sold, and how long it was held.

If the sale took place within 6 months, you will have to pay 20% capital gains tax on the entire amount. If you hold the property for less than six months, you can also opt for a tax-free investment such as a capital gain bond or a Capital Gain Account Scheme.

How to calculate short-term gains?

To calculate short-term capital gains tax on property, you need to determine the full amount of the sale, excluding the cost of improvements. This amount can be either in cash or in kind. In addition, you must include the cost of brokerage that was paid for the transaction.

Moreover, you need to include the expenses of arranging the transaction. The difference between the purchase price and the sale price is known as the Full Value of Consideration.

For a person buying a house or land, the sale of the property is taxable, unless the buyer holds the property for more than two years. In this case, the gain will be treated as long-term capital gain and subject to a 20% capital gain tax.

In this scenario, Mr. A will be required to pay Rs. 1,18,007 in capital gains tax.

Capital Gains Tax: Facts about Short Term Gains

Short-term capital gains are profits from a house sale within three years. Inflation will devalue money over time, so short-term capital gains will be taxed at a lower rate. Long-term capital gains are taxed at 20% plus the Health and Education Cess.

If you have owned the house for more than three years, the gain will be taxed at a higher rate.

If you have sold a residential property in April and it is worth Rs. 90,00000, your profit on the property would be Rs. 6,00,000 as STCG. However, it is important to understand that you’re liable to pay the capital gains tax because the house is considered a capital asset.

In this case, it will be taxable at the individual tax rate. So, in short, it’s advisable to sell your house before April 2020 to avoid paying any additional taxes.

Reinvestment of long-term gain

If you own a property for more than 36 months, you will be subject to capital gains tax. The amount of capital gain you will incur is the amount of the increase in value of your property over the previous year, as measured by the Cost Inflation Index.

In addition to the sale price of your property, the tax amount will also include the brokerage you paid to buy your property.

In order to take advantage of the capital gains tax exemptions, you must reinvest your gains into specified long-term assets. Some examples of these assets are rural electrification corporations, NHAI, and other government agencies.

In order to qualify, you must reinvest your capital gain in these assets within six months of the transfer of your property. Also, the capital gain exemption will not apply if you take out a loan against these securities before three years.

In addition, if you sell your residential property to purchase a new residential property, you can take advantage of Section 54EC.

This section allows you to invest part of the sale price in certain “long-term specified assets.” For example, if you sold your first property, your capital gain from selling your second property was reinvested in an eligible start-up company.

As of April 1, 2017, eligible start-ups have been added to the definition of an eligible company. The re-investment must occur within certain sections of the income tax law.

In January 2020, the Income Tax Appellate Tribunal approved a rule that would allow taxpayers to reinvest LTCG into another residential property.

However, there are conditions to these rules. The proceeds from selling your first property must be reinvested into a new property in the name of a spouse. This must be completed within two years of the sale of the first property.

Facts About Long-Term Gains Re-investments

The tax-efficient way to invest your capital gains is to reinvest the profit you make by purchasing another residential property. However, you must remember that this type of investment is not easy to find. In general, most companies are not consistently profitable.

Thus, if your property was worth Rs 30 lakh in December 2017, you will have to pay a tax of 30% on the profit.

However, if you own two or more residential properties, you can reinvest the profits in another residential property. Depending on the number of capital gains, you may be able to invest the same amount of money in each residential property for up to two years.

You may use this rule once or twice. Just make sure you reinvest the capital gains tax on the property in India once you have sold it.

If you are selling a property, you can reinvest the capital gain in two new houses. Earlier, this benefit was limited to one house, but the Budget 2019 has increased this limit to two.

To qualify for this tax break, you should purchase a new property within one or two years after you sold your previous property. You can even reinvest the gains in constructing a new property.

However, you must complete the construction of the new home within three years of the sale of the previous one.

The formula for Calculation of Long Term Capital Gains

In order to calculate long-term capital gains, the computation is as below:

Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.

Indexed cost of improvement = cost of improvement x cost inflation index of the year of transfer/cost inflation index of the year of improvement.