In today’s world buying and selling properties is part of an investment portfolio. While selling the property, saving capital gain tax is is one of the important aspect for the seller of property.
Capital gain means the profit earned from sale of capital assets (Shares, Property and other capital assets). The taxes imposed by income tax department on capital gain are called as capital gain tax.
If the capital gain is on sale of property asset which is in the possession of seller for less than three years duration then it is short term capital gain (STCG) else it falls in the purview of long term capital gain (LTCG).
Effective tax rates for LTCG are 20% and for STCG as per prevailing income tax slabs.
How to calculate capital gain?
For example we have considered property sold for Rs. 10 lakh which was purchased in the year 2000 and sold in 2012 for Rs. 25 lakh.
Cost of property: 10, 00, 000; Year of property purchase: 2000; Selling price:25,00,000; Year of sale: 2012; Cost inflation index (CII) in year 2000: 389; Cost inflation index (CII) in year 2012: 785; Indexed purchase price: 20,17,995; Capital gain: 04,82,005; Tax (20% of Capital gain): 96,401
Indexed purchase price = (Purchase price* CII for year of sale)/ CII for year of purchase= (10,00,000*785)/389
Cost inflation index is published by income tax considering 1982 as base year. Capital Gain = Selling price- indexed purchase price.
Point to Note: The seller has sold property of Rs 10 lakh into Rs 25 lakhs after holding for twelve years. So as per CII its price was around Rs 20 Lakh, at the time of selling, hence the tax will be applicable on the difference amount (i.e. Rs 25 Lakh – Rs 20.1799 Lakh).
If the seller invests the money for repair of property (Cost of improvement) after the year of purchase (year 2000 in above case) then that cost is also required to be indexed (as per CII calculation shown above) and added to Indexed purchase price.
If the property is purchased before 1982, the same has to be valued from registered valuer and then indexed accordingly.
Now let’s have a look at some of the options which can help us to save long term capital gains tax:
Under section 54 the seller of the property can claim for tax exemption; to avail the benefits seller must use entire profit (capital gain) to buy another house. The seller has two options, either he can buy another house within two year from sale of property else he can build a house in three years. Buyer can also buy a house 1 year prior to selling the house and still can avail the benefit under section 54. If after selling property, seller has not identified the property yet. The seller has to open a special account i.e. capital gain accounting scheme. All the withdrawal from this account should be made only for purchase of property. However if seller failed to buy a property within three years after selling property the whole amount will exposed to LTCG.
Under section 54 EC, seller can invest in bonds issued by National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC). Limit for exemption under section 54 EC is Rs. 50 Lakh. However STCG is being added to the person’s income and exposed to normal income tax slabs.
To save long term capital gain the seller has to buy a house property within two years of sale of capital asset or construct a house within three years. If seller is not able to identify a property he/she can open a capital gain accounting scheme’s special account and park the money until he finds the property (with limit of 3 years). Seller also can invest money in specific bond up to limit of Rs 50 Lakhs to save LTCG tax.