Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
Examples include a house, land, household furnishings, stocks, bonds or mutual funds held as investments etc.,
When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a capital gain or a capital loss. Capital gains and losses are classified as long-term or short-term.
If Land or house property is held for 36 months or less 24 months or less (w.e.f. FY 2017-18) then that Asset is treated as Short Term Capital Asset. You as an investor will make either Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL) on that investment.
If Land or house property is held for more than 36 months more than 24 months (w.e.f FY 2017-18 / AY 2018-19) then that Asset is treated as Long Term Capital Asset. You will make either Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) on that investment.
You may have to pay Capital Gains Tax on STCG / LTCG.
In this post let us understand – How to calculate Short Term capital gains on sale of land or property? How to calculate Long Term Capital Gains on sale of land or house? What are the applicable capital gain tax rates on sale of land / house property? How to avoid / save / minimize capital gains tax on sale of land or flat?
Latest Article :Â Capital Gains Tax Exemption Options on Sale of House or Plot | Latest Rules 2023-24
How to calculate Capital Gains on sale of Land or House property?
Short Term Capital Gains Calculation is calculated as below:
STCG = Total Sale Price – Cost of acquisition – expenses directly related to sale – cost of improvements.
Long Term Capital Gains Calculation;
The LTCG calculation is similar to STCG. The only differences are, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price and also claim certain exemptions to save capital gains tax.
With effective from Financial Year 2017-18, the base year for calculation of Indexation is going to be 2001.
(Indexation is done by applying CII – cost inflation index. This increases your cost base ie purchase price and lowers your gains. Your purchase price is adjusted for the impact of inflation.
How do you calculate the indexed cost of purchase? The indexed cost is calculated with the help of a table of cost inflation index.
Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.
For Example : If purchase year is 2011 and year of sale is in Financial Year 2015. Then indexed cost of purchase would be –
Indexed cost of purchase = (Purchase price / 184) * 254.)
Below is the Cost Inflation Index Table from 2001-02 to FY 2020-21 for your reference. Cost Inflation Index (CII) for FY 2020-21/ AY 2021-22 Notified by CBDT at 280.
What are the applicable Capital Gains Tax Rates on Sale of Property AY 2021-22?
- Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
- Long Term Capital Gains are taxed at 20%.
How do I save Capital Gains Tax from sale of Property?
Capital gains tax on Short term gains is unavoidable and no exemptions are available to minimize your tax liability. However, you can claim deductions to lower the tax liability on long-term gains.
How to save Capital Gains Tax by claiming Exemption u/s Section 54EC? (Applicable to LTCG only, on sale of both land / house property / commercial property)
- Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset.
- These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.
- The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property.The Bonds issued u/s 54EC for saving of LTCG on sale of property will now have a lock-in period of 5 years instead of 3 years from FY 2018-19.- You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).
- You can invest a maximum of Rs 50 lakh during a financial year in these bonds as per Budget 2015-16.
How to save Capital Gains Tax by claiming Exemption u/s Section 54? (Applicable to LTCG on sale of house property only)
You can use the entire Long Term Capital Gain proceeds on sale of a residential house to buy another house property (residential property) to save Capital Gains tax. Below conditions need to be satisfied though;
- The new house has to be bought one year before (under-construction property) the transfer of the first house or within two years after the sale. (For an Under construction property or flat , the construction has to be completed within three years of the transfer of the first property.)
- The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.
- If you plan to use the gain to build a house, it has to be done within three years of the sale of the property. Do note that ‘cost of land’ can be included in the construction cost.
How to save Capital Gains Tax u/s 54F? (Conditions applicable to LTCG on sale of Land or Commercial Property)
Below conditions need to be satisfied in case you sell land and are planning to buy a residential home.
- You can use the entire sale proceeds (received by selling a plot / land) to buy a new house or to build a new residential house.
- If you use a part of the money, the deduction will be proportion of the invested amount to the sale price.
- The time-frame for investment is the same as that for capital gains from residential property.
- You should not own more than one residential house prior to this investment.
- The deducted capital gain (from sale of land) becomes taxable if you buy another house (other than the new one) within two years of the transfer of the original asset or construct a new one within three years.
- If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
- This new house purchased or constructed must be situated in India.
- The proceeds should not be invested in a commercial property or in another vacant plot.
How to Save Long Term Capital Gains Tax without buying another House Property?
If you are unable to invest the sale proceeds in any of the above options before the date of income tax returns filing , you can deposit the CAPITAL GAINS (not entire sale proceeds) amount in a public sector bank or other banks as per the Capital Gains Account Scheme- CGAS, 1988.
- The capital gain (full amount or utilized amount) can be deposited in CGAS account.
- This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.
- The deposited money can be used only to buy or construct a residential house within the prescribed time frame.
- If you withdraw funds from this account, they have to be used within 60 days.
- If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.
- The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.
How to Save Long Term Capital Gains Tax under New Section 54GB(5)?
Under Section 54GB(5) of the Income Tax Act, 1961, long term capital gains on the sale of residential property will be exempt if the sale proceeds are invested in a eligible startup, provided such transfer took place prior to March 31, 2019. As per the latest full Budget 2019-20, this has now been extended to March 2021.
Important points on Capital Gains Tax & Sale of Land / Home
- Agricultural land in a rural area in India it is not considered a Capital Asset, and therefore no capital gains are applicable on its sale.
- While calculating capital gains, expenses related to transfer / sale like advertisement expenses, brokerage expense, Stamp duty, Sale deed registration fees, Legal (lawyer) expenses etc., can be deducted from the Purchase price.
- Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven’t spent any money to acquire it. In such a case, capital gains will be computed on the basis of the cost to the previous owner, indexed to the year of purchase.
- If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately.
- The new property must only be bought on the name of the seller and not on anybody else’s name. Joint ownership can be acceptable but exemption can be limited to the share of ownership.
- You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
- If you use the capital gain amount to clear loans then tax on LTCG cannot be saved. No exemptions can be claimed.
- Capital Gain Tax cannot be saved if the sale proceeds are invested in a commercial property, agricultural land or plot.
- According to the latest amendments in the Income Tax Act, the residential property which is bought by re-investing the long-term capital gains must be situated in India.If you would like to buy a property outside India say in the US, you need to pay tax on the capital gain portion of the sale proceeds.
Latest Article :Â Capital Gains Tax Exemption Options on Sale of House or Plot | Latest Rules 2023-24
To summarize;
- Categorize your capital gains i.e., Short term or Long term.
- Calculate Short Term Capital Gains (STCG) / Long Term Capital Gains (LTCG).
- If you have STCG, taxes are payable as per your income tax slab rate.
- If you have LTCG, to save capital gains tax ;
- You may invest the gains in another Residential property (or)
- Buy Notified Bonds (or)
- Temporarily invest in Capital Gains Account Schemes.
- Else, you have to pay 20% on your Long Term Capital Gains.
Calculation of Capital Gains Tax on sale of property can be sometimes be a tricky one. It is advisable to exercise caution when claiming Capital Gains Tax Exemptions. When in doubt, kindly consult a tax expert or a Chartered Accountant.
Continue reading :
- Is Income from Agriculture Taxable? How to Compute Income Tax on Agricultural Income?
- How to calculate Holding Period & Capital Gains on sale of an Under-Construction property?
- Can a Mortgaged property be Gifted, Willed or Inherited?
- Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
I am selling a residential house. From the capital gain arising out of this sale I want to buy a residential plot from A . Invest the remaining capital gain in a capital gain account and start construction after 6 months through a contractor B. Will complete construction within 10 month from start.
Can I get exemption from capital gain for total amount including cost of land.
I am selling my plot for Rs 30lacs purchased in 1993 for Rs 25000. My expenses for improving etc are rs 1lac . Please caculate LTCG AND TAX?
Dear Pramod,
Total Cost of Acquisition with Indexation is Rs. 87000.
You need to provide the date of incurring cost of improvement for the calculation of indexed cost of improvement.
I purchased BDA plot at Rs. 4.2 L in yr 2003 and now ( Jul/Aug 2023) selling for Rs. 1.31 Cr. Could you pl suggest best Tax saving investment plan.
Regards
Dear Chandra Sekhar,
May I know, if you have any obligations to meet with this Rs 1.31 cr?
Or you would like to re-invest anywhere else?
Did you receive the entire sale proceeds in non-cash mode?
Dear Srikanth,
If one sells a plot and invests in flat – opens a CAGS account, he needs to pay the builder and also to the interior works contractor. Is investment made on interior works eligible for claims?
Thanks and regards
Dear Stikanth,
I purchased a plot in six annual installments from municipality. Last installement was paid in 1989. Possession of Plot given in 2001. Now, I want to sell. How will I work long-term capital gain on the proposed sale. Please advise. Several people could be in this scenario.
Boma
Help! I purchased a piece of investment land in 2002. Sold it in 2021. I am trying to figure out which IRS form I use to show the cost of inflation over the years to lower my capitol gains.
Thank you
Hi
nice info. I also would like to know that My mother inherited a property from my grandmother and then later sold it. The proceeds were distributed 50% between two siblings. can I as one sibling buy property in my name and claim exemption FROM Capital Gains or it needs to be in my Mothers name?
Dear Sreekanth,
Kindly clarify the following:
We cousins bought a residential land in 2011, by cash & cheque. Our contribution is 1:1, but registered the land in one’s name only. We are selling that land now and sharing the amount equally. How to show LTCG in our ITRs ?
I SALE MY HOUSE ON06/09/2020 OF RS.4500000/. TOTAL EXPENDITURE INCLUDING LAND PLUS BUILDING 4000000/. I ALSO PURCHASED A FLAT DT. ON 25/02/2021 OF RS. 2010000/. pl. calculate L.T.C.G. WITH SECTION.
Thank you for your prompt reply. Can you please show an example where it helps to gift part of your property to 2 persons before selling it in order to claim 54EC for each.
Also, if part of the gift is to the wife who is a tax payer, will there be “clubbing of income” problem in the tax payment.
Dear Mr Krishnan,
The transaction costs (property transfer) differ from each state to state.
Suggest you to take help of a CA wrt exact calculations.
Kindly read : Clubbing of Income of Spouse & Child : Definition, Scenarios, Examples & Exceptions
Hi Srikanth, It was very informative. Need your advice on my case.
1. Have purchased a residential property in 2004 for the amount x.
2. Constructed house in 2016 for the amount y
3. After 5 years I would like to sell the property for current market rate (for example z)
My question is
a. How do I calculate cost inflation index for both land purchase (2004) and construction(2015) as the amount differs for both transactions.
b. How should I calculate my long term capital gain for the current market based on this transaction to know how much is taxable?
Dear ARK,
If you have spent money for Construction (Cost of improvement) after the year of purchase, that cost is also required to be indexed (as per CII calculation) and added to Indexed purchase price (Plot).
Construction Cost estimate is always a subjective matter. You can take help of a ‘registered valuer’ and get the right cost. Else you can consider your estimated cost and project it by using appropriate index value.
Excellent presentation which will be very useful.
Before selling a property can’t a person make a Partition deed of specified proportion by including (gifting) his near relatives(wife, son) as co-owners so that each can claim 54EC when the property is sold. This way he can save further on LTCG tax. pl. comment
Dear Mr Krishnan,
Yes, can do so!
But, have to compare the transaction costs involved for doing such transactions (like Gifting) Vs extent of Capital Gain Tax..
Related articles :
* 5 ways of transferring your Immovable (or) Real Estate Property
* Got a Gift? Find out, if it is Taxable or Tax-free?
* Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
Hello Mr Reddy
My name is Gulab from mumbai I am 67 years old lady and need ur suggestions I have resently sold a 1 BHK flat in Pune for 41lk. As I am a housewife I need money for my daily expenses can u plz advise me how I can invest it and also if I can help my daughter buy a home with this money as a loan amount and how can she or her husband can return it back to me. And if I give this money to them as loan to buy them a house and while returning uring the amount to me will it be taxable again or then I can use the money for myself or I have to invest it as per the rules
Request you to kindly help and let me know the right thing I can do.
Waiting for you reply
Thanking you
Regard Gulab
Dear Gulab ji,
May I know if you have received the entire proceeds (Rs41 lakh) in white (non-cash) and the same has been mentioned in the Sale Deed?
Would you like it to give this amount as Loan with interest to your daughter?
what is the procedure for getting CG exemption by investing cumulative CG from sale of 2 house properties in a new flat ?
Dear Mr Rao,
If you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
Accordingly, have to declare it in your IR.
Kindly consult a CA..
Also let us know if there is a way to connect with you directly.
I have a 19 acre piece of land 1/3 inherited and 2/3 are gifts Im in Louisiana USA. This transfer accrued 20 yrs. Ago I am plaining to sell. What capital gain taxes will I be dealing with.
Dear John,
You may kindly go through below articles :
* Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
* Got a Gift? Find out, if it is Taxable or Tax-free?
Hello Sreekanth Garu, your blog is very helpful.
Thank you.
My husband recently sold a residential property and plans to buy another residential property to avoid taxes on capital gains. We have another residential property where I am the primary owner while he is the co-owner. This house was funded by me completely with the loan also being taken by me. In this case, would he still need to pay taxes on capital gains or buying a new residential property be enough? What are the other options? Should we need to drop his name as co-owner?
Thanks in advance for your response.
Dear Lavanya,
As he is the co-owner of the property then taxes on his share in capital gains are applicable. But, you can justify your stand proving that you have funded that purchase earlier.
He can gift his share to you to avoid taxes on his name.
Suggest you to kindly consult a CA in this regard.
Related article: 5 ways of transferring your Immovable (or) Real Estate Property
Dear Sreekanth, Thank you for the above writeup. Could you please clarify on my own Capital Gains tax liability? I own two flats jointly with my wife, one of which I use as my residence while the other one is placed on rent. I am expecting the sale of a joint ancestral property hopefully in the next year, in which my own share of Capital Gains will be around Rs 2.7 -3 crores. Can you please advise me whether I can setoff the tax liability by purchasing a flat (or two flats) in Mumbai where my son resides? If not, please guide me how best I can minimise the tax impact. With regards, R K Makhijani
Dear Makhijani,
You can re-invest the proceeds in a flat.
Suggest you to kindly consult a CA in this regard and take decision.
Related article : Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
Dear Sreekanth, Thank you for your kind response. I shall consult a CA, as you advise. Regards, R K Makhijani
Hi Sreekanth,
Thanks for such an insightful article.
I have some queries on which I want to seek your guidance.
I recently sold my house. The construction of house was done in the plot.
I had bought the open plot in July 2015 and construction was completed in March 2018.
Here
1) the cost of purchase (plot) is ₹1640000/- (Year 2015)
2) the cost of improvement (construction) is 2700000/- (Year 2018)
Now While computation of capital gain the indexed cost of purchase (plot) should be considered as per index of year 2015 Or of year 2018 when the completion of construction happened?
The construction in a plot is considered the cost of purchase or cost of improvement?
Dear Gajanan,
In case a Capital Asset is acquired as Land & Building (together) then the cost of Land & Building is considered as Purchase cost.
However, when after acquisition of Land, building is constructed then the Date of acquisition of land will determine its (land) character of Short term or Long term capital asset. The construction cost shall be in nature of additions and improvement.
Hello
I have a question for the Capital Gain reinvestment.
If I reinvest the capital gain for the purchase of additional floor space in the redeveloped property , can I get exemption under section 54 ?
For example if I sale one flat “A” and the capital gain Amount from this sale is invested to by Additional floor space in Flat “B” which is under consideration for redevelopment. Can I get the capital gain exemption under sec 54 for such investment ?
Dear Ramesh,
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. To claim exemption under section 54, another house should be purchased within a period of one year before or two years after the date of transfer of house.May 22, 2020
In B.B. Sarkarv. CIT45 Case, the question before Calcutta High Court was whether exemption under section 54 can be claimed on the construction of an additional floor in the new asset purchased. The Court allowed the
assessee’s claim.
Conclusion of this court case: The main purpose of the statute is to give relief for the acquisition of a new residential house and hence in that context, it does not really matter whether the new residential house is partly constructed or partly purchased.
But, suggest you to kindly consult a CA in this regard.
Hi Sreekanth,
I had taken ICICI Bank loan to purchase a vacant plot in 2007. and I cleared off the loan in 2009 and I paid ICICI bank interest totaling 2.65 lakhs. Now in Dec, 2020 I sold the land. Can you clarify if I can use the paid bank interest (Rs2.65 lakhs) as deductions for my capital gains calculation.
Dear Sudheer,
No, you can not claim the deductions.
Kindly read :
* Under Construction House : How to claim tax deduction on Home Loan Interest payments?
I had to shift from Mumbai to Bangalore due to transfer of job; now i am planning to purchase the flat here on loan and then sell my existing house in Mumbai; Will i be able to save capital gain by replaying the loan once i get the sale proceeds of my flat in Mumbai? I do not own any other property. If yes, within what period i need to sell my Mumbai flat and repay the loan taken here in Bangalore. if i can not save capital gain tax in this way ( repayment of loan ), then is there any other way i can save capital gain tax on the sales proceeds which i will get after purchase of flat in Bangalore for own stay.
Yes, I would like to be enligtened, because I am also getting into a similar plight. Ihave to first take a loan to buy a 2 BHk in B’lore for my daughter (who just lost her spouse), sell my self-acquired flat in Delhi to dissolve the loan. I do not know the legal implications. RANGASWAMY
I sold a plot in my wife’s name(she is not an assessee) for 4900000/- last year, which was purchased in the year 2003. I purchased a plot last year and I have started construction of the house now. Whether I can utilise the funds in my wife’s account(sale proceeds of plot) for construction for which exemption of CGT can be claimed?
Hello Sreekanth. Thank you for the information. I have residential plot ( 15 years old plot) in one city and want to sell that now and buy a plot in another city and construction house on that immediately. Could you please let me know if I am eligible for exemption from the capital gains tax?