How to Calculate Capital Gains Tax on Property in India?

Any profit or gain that results from the sale of a “capital asset” is referred to as a capital gain. Investments like homes, lands, stocks, mutual funds, jewellery, trademarks, etc., are considered capital assets. Since the gain or profit is regarded as “income,” you must pay taxes on that specific sum in the same year that the capital asset was transferred. In this blog we will see in details How to Calculate Capital Gains Tax on Property in India?.

Additionally, since there is no sale involved in an inherited property—only a transfer of ownership—capital gains do not apply. The assets that were received as gifts or inherited are expressly exempt, according to the Income Tax Department. However, capital gains tax would be applicable if the person who inherited the property intended to sell it. This article has discussed several sorts of capital assets, how to calculate capital gains tax, and much more.

Capital Gains Tax: Latest News

According to the Ahmedabad Bench of the Income Tax Appellate Tribunal, a capital gain exemption cannot be disallowed because property registration was delayed for uncontrollable causes. Uncertainty in the property title is one such instance.

Defining Capital Assets

Any property owned by an assessee, including real estate, buildings, jewellery, cars, machinery, patents, leasehold rights, and trademarks, is referred to as a capital asset. Any kind of legal right, including the management right, is regarded as a capital asset.

Special Cases for Capital Assets

The subsequent items are not regarded as capital assets:-

Any business stock.

Consumables or inputs for trade or vocation.

Furniture or clothing are not regarded as capital assets.

Indian rural districts with agricultural land

Gold Bonds of any form, including those from 1977, and 1980, Special Bearer Bonds, and National Defense Gold Bonds

Capital Gain Tax: Terms You Need to Know

The following are terms relating to capital gains tax that you should be familiar with:

When an asset is transferred, the seller receives or is entitled to full value consideration. Even if the full value is not obtained, the capital gain is still taxable.

The cost of acquisition is the price paid to acquire a capital asset.

Cost of improvement: This is a cost associated with modifying and enhancing a capital asset. Before April 1, 2002, improvements were not taken into account.

What Are the Types of Capital Assets?

Short-Term Capital Assets (STCA): An asset kept for 36 months or less is considered an STCA. The 36-month tenure for immovable properties, such as buildings, homes, or land, has been lowered to 24 months in FY 2017–18. As a result, if you sell your property after 24 months of ownership, the income will be regarded as a short-term capital gain.Let’s have a look How to Calculate Capital Gains Tax on Property in India?
Long-Term Capital Assets (LTCA): An asset that has been kept for more than 36 months is an LTCA. As a result, if you sell your property after more than 36 months of ownership, the proceeds will be regarded as a long-term capital gain.

Tax Chart on Sale of Assets

Following is a rate chart for taxable income from the sale of assets:-

Asset	Duration of asset	Rate of tax
Immovable property like buildings, house	Short term: Less than 24 monthsLong-term: More than 24 months	If short term then the Income tax slab rateIf long-term, then 20.6% with indexation
Movable property like jewellery, royalty, machinery	Short term: Less than 36 monthsLong-term: More than 36 months	If short term then the Income tax slab rateIf long-term, then 20.6% with indexation
Shares which are listed in the market	Short term: Less than 12 monthsLong-term: More than 12 months	If short term then 15.45%If long term, then it is exempted
Mutual funds (equity oriented)	Short term: Less than 12 monthsLong-term: More than 12 months	If short term then 15.45%If long term, then it is exempted
Mutual funds (debt oriented)	Short term: Less than 36 monthsLong-term: More than 36 months	If short term then the income tax slab rateIf long-term, then 20.6% with indexation

How to Calculate Capital Gain Tax on Property?

The duration a property has been owned affects how capital gains are calculated. However, let’s first learn a few phrases that are essential for calculation before we start with the methods to compute capital gains:

Full Value Consideration (Final Sale Price): The amount paid by the buyer for the seller’s capital asset

2. Cost of acquisition: This is the asset’s value when the seller pays for it.

3. Cost of Improvement: A seller’s costs to upgrade or modify a capital asset.

4. Cost of Transfer: The transfer cost includes any fees incurred during the asset sale, such as registry fees, brokerage fees, or other costs.

5. Indexed Cost of Acquisition: This cost is computed by adjusting the inflation values over the years that the asset was held using the Cost Inflation Index (CII). Additionally, this cost can be viewed as the ratio of the years in which an asset was acquired or sold by the seller or the FY 2001–2002. (whichever is multiplied by the cost of acquisition later)

6. Indexed Cost of Improvement: This cost is determined by multiplying the necessary improvement’s cost by the cost inflation index for the year, then dividing that result by the CII for the year the improvement occurred.

Difference Between Short Term and Long Term Capital Gains

The table below shows a few major differences between Short Term and Long Term Capital Gains.

Categories	Short-Term Capital Gain	Long-Term Capital Gain
Meaning	Short Term Capital Gains are gained by investing in short-term capital assets.	Long Term Capital Gains are gained by investing in Long term capital assets.
Amount of Profit Attained	The profit attained may be lower as the investors can hold on to the assets for a short term.	Long-term capital gains are attained from assets held in the market for a longer duration.
Market Aspect	These capital gains are the results of investments made with a short-term market perspective, hence are quicker to attain.	Long-term capital gains are usually higher in amount as they come from assets invested for the long term.
Risk Involvement	The amount of risk involved is low as the investment duration is short.	Long-term investments have a higher risk due to the lengthy waiting period.
Taxability	15 percent of tax is applicable on short-term capital gains. This does not include a surcharge.	20 percent of the tax is applicable on short-term capital gains. However, it can be reduced to up to 10 percent on meeting specific eligibility criteria.

The formula for the Calculation of Short-Term Capital Gains

To calculate short-term capital gains, the computation is as below:

Short Term Capital Gain = Final Sale Price – (Cost of Acquisition + Home Improvement Cost+ Cost of Transfer)

The formula for the Calculation of Long-Term Capital Gains

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

Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where:

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.

Let us take an example to understand the calculations of long-term capital gains better.

Suppose Mr Saxena purchased a piece of land for Rs. 15 lahks in 2006. In 2016, for personal reasons, he sold the plot for Rs. 40 lakhs.

Let’s assume, Cost Inflation Index, CII= Index for the financial year 2016-17/Index for the financial year 2006-2007 = 1024/480 = 2.13

Indexed cost of purchase = CII x Purchase Price = 2.13 x 15,00,000 = 31,95,000

Long term capital gain = Selling price – Indexed cost = 40,00,000 – 31,95,000 = Rs. 8,05,000

Tax on Capital Gain = 20% of 8,05,000 = Rs. 1,61,000

The calculation of long-term capital gains tax has been explained in the table below:-

Particulars	Amount
The sale price of the house	Rs 40,00,000
Less: Any transfer expenses like brokerage, commission (if any)	Here no expenses were done
Net Sale Consideration	Rs 40,00,000
Less: Indexed cost of purchase = Purchase price*cost index of 2006 (117)/cost index of FY 2016 (254)	Rs 31,95,000
Less: Indexed house improvement cost*cost index of 2006 (117)/cost index of FY 2016 (254)	No house improvement cost
Gross Long Capital Gains	Rs 31,95,000

How to Use Capital Gains Calculator?

There are numerous internet resources available for calculating capital gains tax. You must enter the following data to perform the calculations:-

The cost of the property’s sale.
the cost of purchasing the property
Purchase date, including the month and year
The sale’s day, month, and year.
Investment information, such as shares, equity funds, debt funds, gold, fixed maturity plans, etc., that were used to invest capital gains
After that, to determine capital gains for a financial year, you must give the following information:-
Mutual funds, equities, bonds, cash and cash equivalents, exchange-traded funds (ETFs), and fixed deposits are all examples of investment vehicles.
Gain category Long-term or short-term
The year of purchase’s Cost Inflation Index (CII).
The year’s Cost Inflation Index (CII).
Capital gain over the long term without indexation.
Capital gain over the long term using indexation.
The difference between the property’s purchase and sale prices.
the amount of time between the property’s sale and acquisition price
bought-in index price

Cost Inflation Index and its impact on Capital Gains

Due to inflation, money’s worth is always declining. The price of a property in India may be indexed to account for price increases brought on by inflation. The Reserve Bank of India updates the cost inflation index every financial year. The table showing the cost inflation index for 2001–2002 is shown below:

Financial Year	Cost Inflation Index
2021-22	317
2020-21	301
2019-20	289
2018-19	280
2017-18	272
2016-17	264
2015-16	254
2014-15	240
2013-14	220
2012-13	200
2011-12	184
2010-11	167
2009-10	148
2008-09	137
2007-08	129
2006-07	122
2005-06	117
2004-05	113
2003-04	109
2002-03	105
2001-02	100

Any Deductions For Reducing Capital Gains Tax?

An asset owner may lower their capital gains tax following the Income Tax Act. Let’s consider how:

Section 54F: Your full capital gain tax will be excluded if you use 100% of the proceeds from selling a house or piece of land to build a new home. There are a few restrictions placed on it, though.

How to Calculate Capital Gains Tax on Property in India?

Section 54EC: The tax obligation may be diminished if long-term capital gains from the sale of land are used to purchase capital gain bonds. Additionally, you can take advantage of tax deductions by depositing such taxes in the bank under the Capital Gains Account Scheme. Within six months of selling the property, the money should be put in capital bonds, which offer 5–6% annual interest rates. Upon expiration of the five-year lock-in period, capital bonds are automatically redeemed.

things to keep in mind –

To avoid paying capital gains tax, capital-gains bonds cannot be sold or transferred to anyone.
Capital bonds are safe. Credit rating companies like CRISIL have given them a AAA grade.
You can invest in NHAI or REC bonds, which banks sell.
Capital Gains Deposit Scheme: Utilizing the taxable amount to pay for a home or development is another option to lower capital gains tax. It should be completed, though, before submitting a tax return. The new sum should be deposited with a bank under the Capital Gains Accounts Scheme. You can temporarily relax and park capital gains safely by investing in them. You are eligible for tax exemptions if you have placed your capital gains account at one of the recognized banks. The money must, however, stay in the bank for three years; otherwise, the deposit would be considered a capital gain, and the tax must be paid in the next fiscal year.

What is the Capital Gains Tax on Bonds?

Within six months of selling the property, people may invest in certain bonds, such as those issued by Rural Electrification Ltd. and the National Highway Authority of India, following Section 54EC of the IT Act. Before three years, capital gains cannot be redeemed. The bond offers a guaranteed interest rate to the buyer. In a fiscal year, a person may invest up to Rs. 50 lakhs in capital gain bonds. Additionally, the benefit is limited to long-term capital bonds. Let’s see How to Calculate Capital Gains Tax on Property in India?.

Case 1: Sale of House Property

The following costs are subtracted from the overall sale price:

Commission or brokerage fees are paid to find the buyer.

Stamp paper cost

Expenses connected with travel and transfers.

Expenses connected to the inheritance of real estate, such as those incurred during the will-writing and succession certification processes. In some circumstances, it also includes the executor’s fees.

Case 2: The Sale of Shares

Here is what you need to know about deductions related to the sale of shares.

Broker commission related to the sale of shares
STT or the Securities Transaction Tax is not applicable as a deductible expense.

Capital Gains Tax Implications for NRI

You will also be responsible for paying capital gains taxes if an NRI owns real estate in India. The tax is levied following the two categories of capital gains. Short-term capital gains are those made on properties owned for less than two years; long-term capital gains are those on properties held for more than two years.
According to the NRI income tax slab rates, which are based on the total income taxable in India, short-term capital gains are taxed.
The tax rate on long-term capital gains is 20%.
Buyers must withhold 20% tax deductible at source (TDS), which is enhanced to 30% in cases of long-term capital gains.
Under Section 54, an NRI may be exempt from paying capital gains tax. The exemption is only applicable if the capital gain is long-term. You must purchase the new property one year before or two years after the sale of the older property. In other words, it ought to be a short capital gain. Additionally, you might use that money for real estate development. But the building project ought to be finished in three years.

How to Exempt Yourself from Paying the Capital Gain Tax?

Here are a few methods if you want to avoid paying capital gains tax:

The transaction’s gains can be used to buy a new home without taxing you. You must, however, purchase a new residence before submitting your income tax return for that particular year.
Additionally, you can place your long-term capital gains in three-year bonds issued by the National Highways Authority of India and the Rural Electrification Corporation Limited. Please note that the maximum amount you can invest in these bonds in a fiscal year is Rs. 50 lakhs.
You can still avoid paying tax on capital gains even if you don’t immediately want to buy another piece of real estate. All you have to do to retain the money there for two to three years is deposit the proceeds in any public sector bank under the Capital Gains Accounts Scheme (CGAS). To avoid having the money considered a capital gain and paying tax on it, you must invest it in a property by the end of the time frame. If you choose to invest in a ready-made property, you have two years to complete the transaction, but if you choose a property that is still under construction, you have three years.
Your tax will be exempt if the new property developer delivers the property within three years of the purchase.
To determine capital gains, stamp duty and registration fees are considered.

Investing in long-term equities can also help you avoid paying capital gains tax. Your tax obligation will be at its lowest if you purchase high-quality equities from successful companies and hold them for an extended period. Finding organizationss that perform regularly and stick with them for a long time is difficult. You might eventually need to sell the share because the company’s operations could change in the long run.

In addition, you can lower your capital gains tax by comparing your most recent capital losses to your capital gains. The Income Tax regulations of India provide that if a person has any capital losses from prior years, they may offset their capital gains against those losses and reduce the tax liability.

It must be emphasized that long-term capital gains may offset only long-term capital losses. The same holds for short-term capital losses, which short-term capital gains can only offset. The capital loss may also be carried over for a further eight years.

TDS Implications

In case of property worth more than Rs 50 lakh, TDS must be deducted. A TDS of 1% of the property’s value should be deducted before paying the seller.

How Can I Reduce Capital Gain Tax on My House?

By residing in your home for more than two years, you can easily lower the capital gain tax amount or avoid paying the same. All you have to do is keep track of every penny you spend on home improvements or renovations. You can deduct the cost of these improvements from the price of your home, which will help you lower your overall taxable capital gain amount.

Summing Up: How to Calculate Capital Gains Tax on Property?

The incurred capital loss must have been disclosed in prior years’ income tax filings. It must be highlighted. Making money now is simply because of the market’s abundance of investment possibilities. Additionally, if you reinvest wisely, the capital gains tax might be decreased, resulting in significant savings.

Also Read: Makar Sankranti 2023 Festival – Home Celebrations