Capital Gains Tax on Property (A.Y.2023-24): Capital gains tax (CGT) is a tax levied on the profits earned from the sale or disposal of certain assets, including property. When you sell a property for a higher price than what you initially paid for it, the difference between the sale price and the purchase price is considered a capital gain. This gain may be subject to capital gains tax.
Suppose you have sold your residential house or plots, and you need to know how to pay capital gains tax on the property. The property can be either immovable property or movable property. When selling or transferring a property, there can be capital gains or losses. In this article, we will cover all aspects of capital gains on property, including how they are calculated, potential exemptions, and any applicable tax liabilities.
Table of contents
- Types of Property
- Types of Gains
- Capital Gains Tax on Property (Tax Rates)
- Capital Gains on Land and Building - Separate Asset Treatment
- Treatment of Assets Acquired Before 1/4/2001
- How to Calculate Short-Term Capital Gain and Tax on Property?
- How to Calculate Long-Term Capital Gain and Tax on Property?
Types of Property
To fully understand the capital gains tax on property in India, it’s essential to first know the types of properties included in the capital gains tax law.
1. Immovable Property: This includes land, buildings, residential houses, and similar assets.
2. Movable Property: Examples of movable property are gold, jewelry, and other similar assets.
3. Listed Shares: Refers to shares of publicly traded companies.
4. Equity-Oriented Mutual Funds: These are mutual funds primarily investing in equity or stocks.
5. Debt-Oriented Mutual Funds: These mutual funds primarily invest in debt instruments.
In this article, we will focus specifically on the tax treatment of capital gains for A.Y.2023-24 related to immovable property and movable property. If you are interested in learning about capital gains on mutual funds, you can find a detailed article here.
Types of Gains
Now let’s discuss another important concept: long-term capital gains and short-term capital gains. To have a better understanding of capital gains tax on property, it is crucial to be familiar with the different types of capital gains.
The classification of gains as short-term or long-term depends on the holding period of the asset. The holding period refers to the duration for which an individual holds an asset before selling or transferring it. The specific holding periods vary based on the type of asset.
- For example, if an individual sells an immovable property such as a residential house, land, or building within 2 years of its acquisition, the resulting gains will be considered short-term capital gains. On the other hand, if the property is held for more than 2 years before the sale, the gains will be categorized as long-term capital gains.
- Similarly, for a movable property like gold, jewelry, or artwork, if the asset is sold within 3 years of its acquisition, the gains will be classified as short-term capital gains. If the holding period exceeds 3 years, the gains will be treated as long-term capital gains.
Holding Period for Short-Term Capital Gain or Long-Term Capital Gain (A.Y.2023-24)
| Asset | Short-Term | Long-Term |
|---|---|---|
| Immovable Property (e.g., Residential House, Land, Building) | Less than 2 years | More than 2 years |
| Movable Property (e.g., Gold, Jewelry, Artwork) | Less than 3 years | More than 3 years |
| Listed Shares* | Less than 1 year | More than 1 year |
| Equity-Oriented Mutual Funds | Less than 1 year | More than 1 year |
| Debt-Oriented Mutual Funds (Changes for A.Y.2024-25) | Less than 3 years | More than 3 years |
Long-Term Capital Gains on Property
Long-term capital gains apply to assets that have been held for an extended period of time. Here are some examples:
1. Immovable Property: If you hold immovable property such as a residential house, land, or building for more than 2 years, any profits from its sale or transfer will be considered long-term capital gains.
2. Movable Property: For a movable property like gold, jewelry, or artwork, if you hold the asset for more than 3 years before selling it, the resulting gains will be categorized as long-term capital gains.
3. Listed Shares: If you hold listed shares for more than 1 year and then sell them, any gains from the sale will be treated as long-term capital gains.
4. Equity-Oriented Mutual Funds: Similar to listed shares, gains from equity-oriented mutual funds held for more than 1 year are classified as long-term capital gains.
5. Debt-Oriented Mutual Funds: Holding debt-oriented mutual funds for more than 3 years makes any resulting gains subject to long-term capital gains tax.
Short-Term Capital Gains on Property
Short-term capital gains are applicable to assets that have been held for a shorter duration. Here are some examples:
1. Immovable Property: If you sell immovable property like a residential house, land, or building within 2 years of its acquisition, any profits from the sale will be treated as short-term capital gains.
2. Movable Property: For movable property such as gold, jewelry, or artwork, if you sell the asset within 3 years of acquiring it, any resulting gains will be categorized as short-term capital gains.
3. Listed Shares: Holding listed shares for less than 1 year before selling them classifies any gains as short-term capital gains. The tax rate for short-term gains on listed shares is generally based on the individual’s applicable income tax slab rate.
4. Equity-Oriented Mutual Funds: If you sell equity-oriented mutual funds within 1 year of their purchase, the resulting gains will be treated as short-term capital gains. The tax rate for short-term gains on these funds is also based on the individual’s income tax slab rate.
5. Debt-Oriented Mutual Funds: Selling debt-oriented mutual funds within 3 years of their acquisition makes any gains subject to short-term capital gains tax, based on the individual’s applicable income tax slab rate.
Capital Gains Tax on Property (Tax Rates)
Tax Rates for Short-Term (A.Y.2023-24): Short-term capital gains refer to the profits earned from the sale or transfer of assets held for a relatively short period. In the provided table, for immovable property (such as a house) and movable property (such as gold or jewelry), the holding period for short-term capital gains is less than 2 years and less than 3 years, respectively. The tax rate for short-term capital gains is typically based on the income tax slab rate applicable to the individual.
Long-Term Capital Gains Long-term capital gains are generated from the sale or transfer of assets held for an extended period. As indicated in the table, immovable property becomes a long-term capital asset when held for more than 2 years, while movable property qualifies as long-term when held for more than 3 years. The tax rate for long-term capital gains on the immovable and movable property is 20% with indexation, which takes into account the impact of inflation on the acquisition cost and any improvements made to the property.
| Asset | Holding Period of Asset – Short-Term | Holding Period of Asset – Long-Term | Tax Rate – Short-Term | Tax Rate – Long-Term |
|---|---|---|---|---|
| Immovable Property (e.g., House property) | Less than 2 years | More than 2 years | Income tax slab rate | 20% with indexation |
| Movable Property (e.g., Gold/Jewellery) | Less than 3 years | More than 3 years | Income tax slab rate | 20% with indexation |
Capital Gains on Land and Building – Separate Asset Treatment
When it comes to capital gains on property (including land and building) constructed on land, it is important to understand that sites (land) and buildings are treated as separate assets for taxation purposes. In situations where a site is acquired and a building is constructed on it within a specific timeframe, separate calculations for capital gains are required for each asset.
In summary, in scenarios where land/plot is acquired before 2 years and a building is constructed within 2 years, separate calculations will be carried out for capital gains on the land (treated as LTCG) and the building (treated as STCG).
Let’s consider an example to illustrate the concept of separate calculations for capital gains on land and building:
Mr. A purchased a plot of land in January 2019 for Rs. 50 lakhs. Subsequently, he constructed a building on the plot, and the construction was completed in June 2020. In February 2022, Mr. A decides to sell both the land and the building.
For the purpose of calculating capital gains, the following approach will be taken:
1. Capital Gains on Land (LTCG):
Since the land was held for more than 2 years (acquired in January 2019 and sold in February 2022), any profits from the sale of the land will be categorized as Long-Term Capital Gains (LTCG). The LTCG calculation will involve determining the indexed cost of acquisition and applying the applicable tax rate.
2. Capital Gains on Building (STCG):
The building, on the other hand, was constructed within 2 years (completed in June 2020) and sold in February 2022. Therefore, any gains from the sale of the building will be treated as Short-Term Capital Gains (STCG). The STCG calculation will involve considering the cost of construction, any allowable deductions, and applying the applicable tax rate.
By treating the land and building as separate assets and performing separate calculations for capital gains, the tax liability can be determined based on the specific holding periods and tax rates applicable to each asset.
It’s important to note that the example provided is for illustrative purposes only, and the actual calculations and tax implications may vary depending on the specific laws and regulations of the jurisdiction. It is recommended to consult with a tax professional or refer to the relevant tax guidelines for accurate and up-to-date information regarding the treatment of capital gains on separate assets like land and buildings.
Treatment of Assets Acquired Before 1/4/2001
When it comes to assets acquired before 1/4/2001, there are specific rules regarding the calculation of the Cost of Acquisition (COA) and the treatment of improvements made before 1/4/2021. It is a very important aspect while calculating capital gains tax on property purchased before 1st April 2001.
1. Cost of Acquisition (COA):
For assets acquired before 1/4/2001, the COA is determined based on either the actual cost of acquisition or the Fair Market Value (FMV) of the asset as of 1/4/2001, whichever is higher. This means that if the FMV of the asset on 1/4/2001 is higher than the actual cost of acquisition, the FMV will be considered as the COA for calculating capital gains.
2. Ignoring Improvements made before 1/4/2021:
In the case of improvements made to the asset before 1/4/2021, you have to ignore it for the purpose of calculating capital gains. This means that any enhancements or improvements made to the asset before this date will not be factored into the calculation of capital gains.
Let’s consider an example to illustrate the treatment of assets acquired before 1/4/2001 and the calculation of capital gains:
Mr. A acquired a residential property on 1/1/1998 for Rs. 40 lakhs. As of 1/4/2001, the Fair Market Value (FMV) of the property was determined to be Rs. 60 lakhs. Mr. A made some improvements to the property before 1/4/2021.
Now, suppose Mr. A decides to sell the property in 2023 for Rs. 1 crore.
To calculate the capital gains, the following steps would be taken:
1. Cost of Acquisition (COA): Since the property was acquired before 1/4/2001, the COA will be determined based on the higher of the actual cost of acquisition (Rs. 40 lakhs) or the FMV as of 1/4/2001 (Rs. 60 lakhs). In this case, the FMV of Rs. 60 lakhs will be considered as the COA.
2. Ignoring Improvements made before 1/4/2021: Any improvements made to the property before 1/4/2021 will be disregarded for calculating capital gains. Therefore, the improvements made by Mr. A will not be factored into the capital gains calculation.
Now, considering the selling price of Rs. 1 crore, the capital gains can be calculated as follows:
Capital Gains = Selling Price – COA
= Rs. 1 crore – Rs. 60 lakhs
= Rs. 40 lakhs
Now, to calculate the tax on long-term capital gains:
Tax on Capital Gains = Capital Gains * Tax Rate = Rs. 40 lakhs * 20% = Rs. 8 lakhs
Education Cess = Tax on Capital Gains * Education Cess Rate = Rs. 8 lakhs * 4% = Rs. 32,000
Total Tax Liability = Tax on Capital Gains + Education Cess = Rs. 8 lakhs + Rs. 32,000 = Rs. 8,32,000
How to Calculate Short-Term Capital Gain and Tax on Property?
To calculate the short-term capital gain on the property, you need to take into account the following factors:
1. Consideration Received: This refers to the amount of money or the value of other assets received in exchange for the sale or transfer of the property. It includes the full value consideration received for the transaction.
2. Cost of Acquisition: This is the cost incurred to acquire the property initially. It includes the purchase price of the property along with any additional expenses such as registration fees, brokerage charges, legal fees, etc.
3. Cost of Improvements or Alterations: If you have made any improvements, alterations, or renovations to the property, you need to consider the cost of these enhancements. It includes expenses related to repairs, renovations, or any additions that have increased the value of the property.
4. Expenses Pertinent to the Sale or Transfer: This includes any expenses incurred in the process of selling or transferring the property. It may include brokerage fees, legal fees, advertisement expenses, or any other costs directly associated with the sale or transfer.
By considering these factors and applying them to the relevant formula, you can calculate the short-term capital gain on the property.
How to Calculate Long-Term Capital Gain and Tax on Property?
To calculate long-term capital gain on the property, the following factors are taken into consideration:
1. Full Consideration: This refers to the total amount received upon the sale or transfer of the property. It includes the entire consideration received, whether in the form of money or other assets.
2. Indexed Cost of Acquisition: The cost of acquiring the property is adjusted for inflation using the cost inflation index (CII). This indexed cost accounts for the increase in the value of money over time, ensuring a fair assessment of capital gains.
3. Indexed Cost of Improvements: If any improvements, renovations, or alterations were made to the property, the cost of these enhancements is indexed using the CII. This adjusted cost is considered while calculating the capital gains.
4. Expenses during Sale or Transfer: Any expenses incurred during the process of selling or transferring the property are taken into account. This may include legal fees, brokerage charges, advertisement expenses, or other relevant costs associated with the sale.
5. Tax Exemptions: Certain tax exemptions may be applicable under the tax laws, such as exemptions for reinvestment in specified assets or exemptions for properties held for a specified period. These exemptions can help reduce the taxable amount of long-term capital gains.
By considering these factors and using the appropriate calculations, the long-term capital gain on the property can be determined. It is important to keep proper documentation of the transactions, expenses, and any eligible exemptions to accurately calculate the long-term capital gain and fulfill the tax obligations accordingly.