Selling property is a significant financial transaction, and understanding the tax implications under the Income-tax Act, 1961 is crucial for anyone involved in real estate transactions. Whether you've recently sold property or are considering it, navigating the complexities of capital gains tax and other related provisions is essential for effective financial planning and compliance with tax laws. In this article, we will understand the tax implications on the sale of property.

Budget 2024 Updates

Budget 2024 has proposed the following amendments effective from FY 24-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months. Thus, an immovable property held for more than 12 months is considered long-term.
• Short-term capital gain on the sale of property continues to attract tax at slab rates.

What are Capital Gains on the Sale of Property?

Profit or gain arising from the sale of property is called a Capital gain on a property. Capital Gains are divided into two categories:

Long-term Capital Gain

If you sell the property after holding it for more than 24 months, the profit will be classified as long-term capital gains (LTCG). 

Short-term Capital Gain

If the asset is sold within 24 months of its acquisition, it is classified as short-term capital gain (STCG). 

Tax Rate for Sale of Property

The tax rate for short-term capital gain and long-term capital gain is different and hence it is very important to classify the gains into LTCG and STCG. The difference in tax rate between LTCG and LTCG on sale of property is as follows:

Calculation of Tax on Short-term and Long-term Gains from the Sale of Property

Short-term Capital Gain/Loss

Short-term capital gains are taxed as per the income tax slab rates applicable to the individual. For instance, if the short-term capital gain is Rs 6 lakh and the person falls in the 30% tax bracket, then he/she has to pay 31.20% on Rs 6 lakh, i.e. Rs 1,87,200. Gain/loss from the sale of the property is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale from the sale proceeds of the asset.

Short Term capital gain computation:

Long-Term Capital Gain/Loss

For sale of immovable property made on or after 23rd July, 2024, which are classified as long term capital assets, the computation of capital gains will be similar to the computation of short term capital gain in above table (i.e., without indexation) and the tax rate applicable on the said LTCG will be 12.5%.

As mentioned above, sale of land and building made from 23rd July 2024 will attract a tax rate of 12.5% without indexation benefit or a 20% tax rate with the indexation benefit at the option of taxpayer, if such property has been acquired before 23rd July, 2024. For sale of properties acquired on or after 23rd July, 2024, the tax rate will be 12.5% without indexation which are qualified as long term assets.

Long-term capital gains are taxed at the rate of 20.8% (rate including health and education cess @ 4%) with indexation. Indexation is a technique to adjust the cost of the asset according to the inflation index. It will increase your cost and reduce your gains and thereby, tax liability. So, under long-term capital asset, the benefit of indexation is available, plus the person who falls in the tax bracket of 30% also gets the advantage of paying the lower tax rate of 20%. Long-term capital gains are calculated in the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and indexed cost of the improvement (The indexation benefit and tax rate of 20% was applicable till 22nd July, 2024).

The calculation of Indexed cost can be done with the help of the following formula:

Indexed Cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year of sale / CII of the year in which the property was first held or FY 2001-2002, whichever is later.

CII Index data for every year since FY 2001-02 till date is available here.

Note: If the property was acquired before 1 April 2001, the actual cost of the property or the FMV of the property as of 1 April 2001, as opted by the taxpayer, should be deemed to be the cost of acquisition.

Tax planning tip: If the immovable property was acquired before 1 April 2001, then property valuation as of 1 April 2001 needs to be obtained from a registered valuer. This will enable you to increase your cost of acquisition, thereby reducing the capital gain.

Indexed Cost of Improvement=Cost of improvement * CII of the year or sale / CII of the year in which improvement took place

Note: Improvement costs incurred before FY 2001-02 should not be considered.

Example: Mr A bought a residential apartment on 1st Jan 2017 for Rs 20,00,000. He spent Rs 200,000 on interiors on 1st May 2020. Now, on 1st May 2024, he is planning to sell the property for Rs 60,00,000. Calculate the capital gain on the same.

Answer: 

1. Holding Period: Since the immovable property is held for more than 2 years it will be classified as long-term capital gain.
2. Long-term capital gain computation as follows

Example: If in the above example property is sold in August, 2024

Set Off & Carry Forward of Losses on Sale of Immovable Property

The loss from immovable property also will depend on the classification of the capital gain. The long-term capital loss from the sale of property can be set off with long-term capital gain from any other asset and any excess loss can be carried forward for 8 subsequent years and can be set off with long-term capital gain only.

The short-term capital loss can be set off with both short-term capital gain and long-term capital gain and excess loss can be carried forward for 8 subsequent years and set off with short-term capital gain and long-term capital gain.

Note: It is mandatory to file ITR before the due date to carry forward your losses.

Related Articles

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F