Capital Gains on Sale of Property in India

Capital gains basically refers to the gains or profits generated through the sale or transfer of any property or asset. Such properties can be defined further as movable or immovable and tangible or intangible assets that are legally owned by an individual. These include but are not limited to equity shares, equity-oriented funds, plots, residential properties, buildings, properties, and gold. Any profit acquired by selling or transferring such assets falls under the capital gains category and shall be taxable as per the capital gain tax norms.

The Capital Gain Tax on properties is levied on the profit gained by sale or transfer of assets by an individual who does not consider it as their profession and primary source of income. In case selling properties or assets is your primary source of income, gains generated shall fall under ‘income from business or profession.’

Calculating Capital Gain

Under Section 48 of the Income Tax Act, capital gains are calculated as per the following method:

Particulars		Amount
A	Complete Value Consideration (i.e., sales consideration of asset)	XXX
B	Less: Expenditure incurred entirely and exclusively through the transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.)	(XXX)
C	Net sales consideration (A-B)	XXX
D	Indexed acquisition cost	XXX
E	indexed improvement cost (if any)	XXX
F	Total Cost (D+E)	XXX
G	Capital Gain [C-F]	XXX

 

How to Calculate Indexed Cost of Acquisition

Indexation refers to adjusting the price of acquisition of an asset as per the effects of inflation on the concerned asset. To simplify and eliminate any confusions, the Central Board of Direct Taxes (CBDT) has set a cost inflation index for such asset-related transactions. It must be considered that this indexation benefit is only applicable on long-term capital assets (read more about it later in the article).

The following factors need to be considered to compute indexed cost of acquisition:

• Year of purchase.
• Year of transfer.
• Cost inflation index of the year the asset was purchased.
• Cost inflation index of the year the asset was transferred.

The formula used to calculate the indexed acquisition cost is:

Indexed Cost	=	Cost of Inflation Index (CII) for the year of transfer (sale)	X	Cost of Acquisition
of Acquisition		CII for the first year in which asset was held by assessee or year 2001-02, whichever is later

The Central Government specifies the cost inflation index by stating it in the official notice. The cost inflation index = 75% of the average rise in the Consumer Price Index for the immediately previous year. The current cost of index is stated below:

S No.	Financial Year	Cost Inflation Index (CII)
1	2001-02 (Base Year)	100
2	2002-03	105
3	2003-04	109
4	2004-05	113
5	2005-06	117
6	2006-07	122
7	2007-08	129
8	2008-09	137
9	2009-10	148
10	2010-11	167
11	2011-12	184
12	2012-13	200
13	2013-14	220
14	2014-15	240
15	2015-16	254
16	2016-17	264
17	2017-18	272
18	2018-19	280
19	2019-20	289
20	2020-21	301
21	2021-22	317
22	2022-23	331

Full Value Consideration

Section 50C of the Income Tax Act states that ‘where the consideration received or accruing as a result of the transfer by an assessee of a capital asset is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer,  the value so adopted or assessed shall, for the purposes of Section 48 (mentioned above), be deemed to be the full value of the consideration received or accruing as a result of such transfer.’

Some relief has been offered from assessment year (AY) 2019-20, where the above-mentioned provisions would not be applied if the difference between the actual sale value and stamp duty valuation of such property is either less than or equal to 10% of the actual sale value or INR 50,000, whichever is higher.

Capital Gain Tax Rate

The overall tax burden on capital gains as calculated above varies depending on the duration for which the capital asset was held before the transfer. Under Section 2(42A) of the Act:

• If the asset has been held for 24 months or less, the capital asset becomes a short term capital asset. The capital gains calculated as per the above-mentioned method are known as Short Term Capital Gain (STCG). The STCG calculated as per above-mentioned methods is considered a part of the total income of the individual and shall be chargeable to tax as per the normal tax rate applicate on the individual.
• If the asset has been held for more than 24 months, the capital asset becomes a long-term capital asset. The capital gains calculated as per the above-mentioned method are known as Long Term Capital Gain (LTCG). Under Section 112, the capital gain calculated shall be liable to be taxed at a rate of 20%.

What is the Liability on the Buyer?

• Under Section 194-IA, it is the responsibility of the individual buying an immovable property, other than agricultural land, that has a stamp duty value of more than INR 5 lakhs to deduct TDS of one percent of the total sale value.
• When the amount of actual purchase value of an immovable property payable to a buyer is less than the stamp duty value of such property, the difference between the stamp duty value and the purchase value of the property shall be taxable in the hands of the buyer under the ‘Income from Other Sources’ head as per the normal tax rate applicable. However, this will not be applicable if the difference between the two figures does not exceed INR 50,000.

Saving on Capital Gain Tax

Capital Gain Tax on the profits earned by selling any immovable property can be saved by investing as per the below-mentioned provisions of the Income Tax Act.

Section	54	54EC	54GB	54F
Brief Description	If any individual/HUF sells a residential house and earns a profit of say INR 100, then they can save tax on INR 100 if they buy other residential house of value more than INR 100 within one year of selling the original residential house or even if they construct other residential houses within 3 years of selling the original residential property. Note: If they had started construction 2 years prior to the sale of the original house, they could enjoy the tax saving provisions as well.	If any person has sold any land or building and earned a profit of Say INR 100, then they can save the profit earned on selling such land/building if they buy bonds of BHAI or RECL within 6 months of selling such land/building worth INR 100	If any individual/HUF sells a residential house and earns a profit of say INR 100 (500 sales value – 400 cost/expense), then they can save tax on INR 100 if they purchase and hold 50% or more equity shares of a newly incorporated company, and such company makes investment in new plant and machinery as prescribed. The profit of INR 100 shall not be liable to tax if the amount of shares purchased are INR 500 or more	If any individual/HUF sells any long-term asset other than residential house and earns a profit of say INR 100 (500 sales value – 400 cost/expense), then they can save tax on INR 100 if they buy a residential house of value more than INR 500 within 1 year of selling the original residential house or even if they construct a residential house within 3 years of selling the asset. Note: If they had started construction 2 years before selling the original house, they could enjoy tax saving provisions as well.
Eligible Assessee	Only Individual or HUF	Any Assessee	Only Individual or HUF	Only Individual or HUF
Asset Sold	Capital asset being residential house/land appurtenant thereto	Capital asset being land/building or both	Capital asset being residential property	Any long-term capital asset except residential property
Exemption Amount	Amount of Capital Gains	Amount of Capital Gains	Amount of Sales Consideration	Amount of Sales Consideration
Investment made in purchase of	Residential house in India (only 1) - purchase or construct the same	Invested in Specified bonds of NHAI (National Highway Authority of India) or RECL (Rural Electrification Corporation Limited)	Purchase of Equity Shares of an Eligible Company in which the assessee holds 50% or more shares/voting power, and the eligible company makes investment in new plant and machinery as prescribed	Residential house in India (only 1) - purchase or construct the same
Time Period of Purchase	If purchased - within one year before or 2 years after or If constructed - within 3 years after the sale/transfer. Also refer to Note-1 below.	within 6 months of transfer	Before due date of income tax return for that particular financial year	If purchased - within one year before or 2 years after or if constructed - within 3 years after the sale/transfer. Also refer to Note-1 below.
Consequences of selling the new asset before a certain period	If new asset is sold within 3 years, while calculating capital gains for the new asset, capital gain exempted earlier will be reduced from the cost of the acquisition of the new asset sold while calculating the capital gain of new asset	On sale of securities or otherwise conversion into money within 5 years, long term capital gains exempted earlier will be taxable in the year of such sale or conversion	if the new asset (shares or plant & machinery) is sold within 5 years, long term capital gains exempted earlier will be taxable in the year of such sale in hands of respective assessee	If new asset is sold within 3 years, while calculating capital gains for the new asset, capital gain exempted earlier will be taxable in the year of such sale