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How much tax do I have to pay for selling my house or property?  What will be the tax implications for me or my father/mother on the sale of house? What are taxes on selling the inherited property? What is the tax liability on selling a house if my parents sell the house and gift the sale proceeds to me? This article tries to answer questions related to tax on sale of a house.

Overview of Capital Gain Tax on Sale of House or Property

  • The time period: Check the time period between when you bought the house/property and when you sold it.  if you have inherited the property the period of holding will be considered from the date of purchase by your ancestors.
    • If a property is sold within two years(from FY 2017-18 earlier was three) of buying it, it is treated as a short-term capital gain. This is added to the total income and taxed according to the slab rate.
    • If a property is sold after two years (from FY 2017-18 earlier was three) years from the date of purchase, the profit is treated as a long-term capital gain(LTCG) and is taxed at 20% after indexation.
  • The Purchase cost and Fair Market Value:  If the property is purchased before 1 Apr 2001 then the fair market value of the property as on 1 April 2001 can be considered as the cost of acquisition. For ascertaining the Fair market value, it is best to engage the services of a registered valuer.  Our article Fair Market Value: Calculating Capital Gain for property purchased before 2001 covers it in detail
  • House improvement cost and transfer cost: While computing the cost of acquisition one can also add the costs incurred with respect to procedures associated with house improvement or transfer cost such as the will and inheritance, obtaining succession certificate, costs of the executor, property valuer etc.
  • Find the indexation purchase cost: The long-term capital gain(LTCG) shall be computed as the difference between net sale proceeds and indexed cost of purchase. For indexation, the cost of acquisition should be adjusted by applying the cost inflation index (CII).
  • Find the capital gain. Check out our Capital Gain Calculator from FY 2017-18 with CII from 2001-2002 
    • For short-term capital gain = final sale price – (the cost of acquisition + house improvement cost + transfer cost).
    • In case of long-term capital gain, capital gain = final sale price – (transfer cost + indexed acquisition cost + indexed house improvement cost).
  • Saving Long Term Capital Gain: If there are any long-term capital gains, one may have to either
    • pay tax on it at the rate of 20% or
    •  Buy a new property
      • either 1 year before the sale  OR
      • 2 years after the sale of the property/asset OR
      • The new residential house property must be constructed within 3 years of the sale of the property.
    • Save capital gains tax by buying specified bonds u/s 54EC
  • Capital LossSet off of Capital Losses: The Income Tax does not allow Loss under the head Capital Gains to be set off against any income from other heads – this can be only set off within the ‘Capital Gains’ head. Our article Capital Loss on Sale of House discusses it in detail.
    • Long-Term Capital Loss can be set off only against Long Term Capital Gains.
    • Short-Term Capital Losses are allowed to be set off against both Long-Term Gains and Short Term Gains.
  • Carry Forward of Losses if return is filed before due date: If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was first computed.  To keep a track of your losses, the Income Tax Department has laid out that Losses for a year cannot be carried forward unless that year’s return has been filed before the due date. Even if it’s a loss return, you do not have any income to show – do file your return before the due date.

On Selling the House or Property

When you sell your house, you are liable to pay tax. Gains or Loss which arise from the sale of capital assets,such as Gold,  Debt Mutual Fund and Property etc are subject to tax under the Income-tax Act, under the head Capital gains.  The tax paid on this amount of capital gains is called Capital Gains Tax. Conversely, if you make a loss on sale of assets, you incur a Capital LossThis is explained in our article  Basics of Capital Gain 

Capital Gains for Real Estate or Property

For Real Estate the computation of capital gains are as follows:

  • If a property is sold within two three years of buying it, it is treated as a short-term capital gain. This is added to the total income and taxed according to the slab rate.
  • If a property is sold after two three years from the date of purchase, the profit is treated as a long-term capital gain and is taxed at 20% after indexation .
  • If you took property on home loan, claimed the tax deduction for the principal under Section 80C and  property is sold within five years, the tax benefits will be reversed. The entire tax deduction ,for repayment of principal component of the home loan ,claimed in earlier years under section 80c , will be considered as your income (in addition to capital gains) in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

Note: From FY 2017-18 onwards: The criteria of 36 months has been reduced to 24 months in the case of immovable property being land, building, and house property.

While you can avail of various tax exemptions in case of long-term capital gains, no such benefit is provided for short-term ones.

Budget 2014  introduced

  • An amendment to Section 54EC and from FY 14-15 i.e. AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs
  •  An amendment to Section 54F to be effective from FY 2014-14 i.e. AY 15-16 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.

Any money spent on improvement by the seller and the previous owner prior to 1 April 2001(1981) will be ignored. For improvement expenses after 1 Apr 2001(1981), the indexed cost as per the relevant financial year will be added to the cost of acquisition

Short Term Capital Gain = Sale Price -
 (Cost of Acquisition + Cost of Improvement + Cost of Transfer)
Long Term Capital Gain  = Sale Price - 
(Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)
Indexed Cost  = Cost incurred * 
(CII of the year of transfer)/ (CII of the year of Acquisition or Improvement)

Capital gain Tax on Sale of House and Income Tax Return (ITR)

For salaried person, If you have made capital gains during the year, you need to fill ITR Form 2, as Form 1 is only for income from salary/pension, one house property and other incomes (excluding from lottery). ITR Form 2, is for declaring income from (sources other than the one declared in Form 1) capital gains, all house properties and other sources (including lottery).

From when does one calculate two three years on buying the property? Will it be from the date of possession or the date of allotment ?

Say one  booked a flat in January 2007 and was issued an allotment letter with the floor and flat number. He got the possession on 1 December 2014. If he sells this flat in Feb 2015, how will the capital gain be calculated? Will it be from the date of possession (short term) or the date of allotment (long term)?

Determining the date of purchase of flats under financing schemes is a matter of debate and there are conflicting views on the subject.One view is that while calculating capital gains, the date of allotment is taken as the date of acquisition.By getting the allotment letter, the individual is construed to have received the right to that property; the payment of instalment is merely a follow-up action. Therefore, in your case, the capital gains should be long term in nature on the basis of the date of allotment. The allotment letter should have the details of the flat in the proposed building, your name as the purchaser of the property or one that gives you unconditional rights to dispose of the property.

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. For inherited property, the cost to the original owner will be considered as the cost of acquisition for computing capital gains. If the property has been acquired prior to 1 April 1981, the acquisition cost will be the cost incurred by the original owner or the fair market value of the property as on 1 April 1981, whichever is higher

How is the short term capital gain calculated on sale of house?

Short term capital gain is calculated on difference between the sale and purchase price. Amount of tax depends on the tax slab of person. Current tax slabs are 10%, 20% and 30%. Our article Understanding Income Tax Slabs,Tax Slabs History explains the tax slab in detail. You can try our  Capital Gain Calculator with CII from FY 2017-18

I bought a flat for  Rs 15 lakh in April 2012 with a home loan and got the tax benefit during 2012-13 and 2013-14. I sold the flat in March 2014 for Rs 22 lakh. What are the tax implications of this deal?

As you have sold the flat within two three years of buying, the gains will be added to your income for the year 2013-14 and taxed accordingly. In the highest 30% tax bracket, the tax comes to roughly  30%  of 7 lakh (22 lakh – 15 lakh) i.e Rs 2.1 lakh. If you had claimed deduction for prepaying the principal under Section 80C in the previous years, the tax benefits will be reversed because the property was sold within five years.

You purchase a new house for Rs 15 lakh and claim a deduction of Rs 8 lakh. Now suppose you sell this house after two years for Rs 25 lakh.

The exempted amount will be deducted from the purchase cost for calculating the capital gain in the next five years. As you sold the house within 5 years, the tax exemptions will be reversed. Your actual profit is Ra 10 lakh (Rs 25 lakh – Rs 15 lakh). But as you had claimed deduction which needs to be reversed  your capital gain will be Rs 18 lakh = Rs 10 (Rs 25 lakh-Rs 15 lakh) and deductions claimed (Rs 8 lakh).

Long Term Capital Gain and Indexation

The advantage associated with long-term capital gains is factoring of inflation while determining the profit by what is called as indexation .  Inflation reduces the value of an asset over time. The concept of indexed cost allows the taxpayer to factor in the impact of inflation on cost. Consequently, a lower amount of capital gains gets  taxed than if historical cost had been considered in the computations.  To use Indexation multiply the original cost price with a factor that is issued by the Central Board of Direct Taxes. This factor tracks the increase in the general price level, or inflation, and is known as the cost inflation index (CII). It is notified by the central government for every financial year. The Income Tax Act considers 1981-82 as the base year with a cost inflation index of 100. So, the CII for 1982-83 is 109, and so on. Our article Cost Inflation Index from Financial Year 1981-82 to Financial Year 2011-12 covers Cost Inflation index in detail and our article Cost Inflation Index,Indexation and Long Term Capital Gains explains on how to calculate Long term capital gains.

If you purchased your property in 1994 (1994-95) for Rs.10 lakh and sold it (in 2014-15) for Rs.1 crore. Thus, the basic capital gain on this sale will be Rs. 90 lakh, on which the tax charged will be  20%  i.e Rs .18 lakh. However, if you apply indexation, the capital gain reduces to Rs 39 lakh, and the resultant tax outgo to Rs 7.8 lakh.

Save Long-term Tax on Property By Buying another property

You can claim tax exemption under Section 54 on the long-term capital gain on the sale of a house. To avail of this exemption, you must

  • Use the entire profit to either buy another house within two years or
  • Construct one in three years.
  • If you had already bought a second house within a year before selling the first one, you could still avail of the tax exemption,

You can also utilise Section 54F to avail of exemption on the long term capital gain made from the sale of  land (actually it is any asset other than a house). Again, the sale proceeds should be invested only in a residential property , not a commercial property or a vacant plot of land. However, to avail of this benefit, you should not own more than one house.

If you sell the property deduction under Section 54F/EC is on the gain allowed . But if you sell let the entire sale proceeds are invested in a new house or used to build a new house. If you use a part of the money, the deduction will be the proportion of the invested amount to the sale price.More on it is given in our article Capital Gains Account Scheme and Sale of property

Capital Gain Account: Save Long-term Tax on Property when you do not buy another property

But what if you don’t want to buy a property at all with the capital gain (LTCG) amount? You can still get tax exemption. The long-term capital gain tax can also be saved under Section 54EC if the capital gain is invested for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house. However, you can invest only up to 50 lakh. More on it is given in our article Capital Gains Account Scheme and Sale of property

I am selling one of the two houses I own. Can I avoid the capital gains tax by depositing the proceeds in the Capital Gains Account Scheme (CGAS)? Can the CGAS deposit be withdrawn within a year to buy another house or is there a lock-in period?

There are two types of CGAS accounts: Type A is akin to a savings account, while Type B works like a fixed deposit. You can open an account with any leading PSU bank. However, the deposit in CGAS is only an interim measure to help you avoid long-term capital gains tax in the year that you sell the asset. The actual liability can only be avoided by either purchasing or constructing another house within the mandated time period. The Type B CGAS has a soft lock-in period similar to any fixed deposit. Hence, premature withdrawals may attract a penalty. There is no such restriction in Type A accounts. However, long-term capital gains tax will have to be paid on all deposits in the CGAS that are not utilised after three years of the initial deposit. Any withdrawals from CGAS are usually permitted only after filling up a form, which expressly states the purpose of withdrawal. The money must be utilised for the stated purpose within 60 days of withdrawal.

Long-term Capital Gain for NRIs

According to the latest amendments in the Income Tax Act, the residential property bought to re-invest long-term capital gain on sale of property must be situated in India. If one wants to buy house located in the US, he needs to pay tax on the capital gain portion of the sale proceeds. This gain is calculated after reducing the inflation indexed cost of the property from the sale proceeds. You can also deposit the capital gain amount in the capital gains account scheme of specified banks, and purchase a house in India within two years or construct a house within three years. This amount, if unutilised for the said purpose, becomes taxable in the third year of the sale of the original property.

References: Income Tax Information Series How to Compute Capital Gains (pdf)

Buying a House,Renting,Home Loan,Tax,Selling,Capital Gain

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