All About Capital Gain Tax
The capital gain tax is one that few people are aware of. Capital gain tax is not paid in India if a person inherits a property and no sale occurred, as per Income Tax Act. If the person who has inherited the property decides to sell it, however, tax will have to be paid on the profit. Some of the examples of capital assets are machinery, Jewellery, leasehold rights, trademarks, vehicles, house property, building, and land.
Simply explained, a capital gain is any profit or gain derived from the sale of a “capital asset.” Because this gain or profit falls under the category of ‘income,’ and hence you will have to pay tax on it in the year in which the capital asset is transferred. This is called capital gains tax, and it can be either short- or long-term. Capital gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. However, capital gains tax will apply if the asset is sold by the person who inherited it.
What is Capital Gain Tax (CGT)?
Capital gain tax refers to any gain or profit that is earned by the individual from the sale of a capital asset. The profit arises from the sale of the capital asset is taxed under the head of ‘Income from Capital Gain’. The profit is earned by selling the capital asset at a higher price than what it was bought for. Capital gains tax is not applicable to the inherited property, as there is an only transfer of ownership and no sale. Any asset which is received as a gift by way of will or inheritance is totally exempted from the Online Income Tax Act 1961. However, CGT will be applicable if the individual who inherits the asset decides to sell it.
Capital Gain Tax on Property:
Capital gain tax is chargeable on the profit earned from the selling of house property, however, the tax is not charged on the entire amount itself. In case, a person sells the property in the time period of three years then it will be taxed directly according to the income tax slab the person falls under and will be termed as a short term capital gain tax. Short term capital gain attracts a flat 20% tax.
Income tax exemption is applicable on the long-term gain which occurs from the sale of a capital asset under section 54 and 54F of IT Act if the investment is made in construction and purchase of house property, subject to specific conditions. In order to avail tax exemption, the individual should buy the residential house within the tenure of 2 years after or 1 year before the transfer of the original house. Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house. It is important to keep in mind that the investment made on the house property should be situated in India.
The advance that is paid for the sale of the house property is taxed and it is later fortified by the person for sale of flat in case the transaction does not go through. Under the head of ‘income from other sources,’ the advance amount that is paid is taxed in the same year. At the time of determining the capital gains, the advance amount can be reduced from the acquisition cost of the asset in the year the capital asset is sold.
An individual can build or purchase a house from the capital gains in the time period of 2 years from selling the house property. Moreover, the individual can also book a flat and save on taxes with the capital gain. Besides this, the individual can also avail tax benefit by investing the capital gains in banks Capital Gains Account Schemes (CGAS). Apart from this one can also invest in specific bonds like National Highway Authority of India and Rural Electrification Ltd. within 6 months from the date of sale of the property.
However, capital gain tax on the property offers tax exemption, it is important to keep in mind that with one sale of property one can invest only in one new asset and cannot an investment in multiple assets to minimize the tax. In case, a person is selling more than one property then they can invest the accumulative capital gain amount in only one new property.
Capital Gains Tax Exemption:
- No capital gain is applicable to the sale of agriculture land in the rural areas of India and the agricultural land in rural areas is not considered as a capital asset.
- In case an individual uses the entire sale proceeds of the capital asset to purchase the house property they will not be taxed.
- The assessment must satisfy the below-mentioned conditions in order to avail tax benefit under Section 54F:
- An individual requires buying a house within 2 years after or 1 year before the sale.
- Any under construction properties should be completed in the time period of 3 years from the transfer date of the original house.
- The individual cannot sell the house property within 3 years of the buying or construction.
- It is important to keep in mind that the investment made on the house property should be situated in India.
- The individual should not own more than 1 residential house property other than the new one on the date of transfer.
- The individual will not have to pay tax in capital gain if they invest in CGAS (capital gains account scheme). However, the person should make an investment for a specific time period as stated by the bank. If the taxpayer fails to make the investment for a specific time period, then it will be considered as a capital gain.
How to Save Capital Gains Tax on Selling a Property
Land is a Capital Asset, and because it is an appreciated asset, a landowner can make huge capital gains on its sale. However, Agricultural land in a rural part of India, on the other hand, is not considered a Capital Asset. So, no capital gains are applicable on its sale. Before we look into how your capital gains will be taxed, check sure your asset is categorized as a capital asset by Income Tax.
Individuals and Hindu Undivided Families are excluded from long-term capital gains tax (under Section 54 of the Income Tax Act, 1961) on the sale of a residential property if:
- The capital gains are put towards buying or constructing a new home.
- The new house is purchased 1 year before or 2 years after the sale of the old house.
- The new house is built, within three years of the sale of the old house.
- Only one extra house property is bought and built.
- The property being purchased / developed is located within India’s borders.
- You don’t sell your new home for three years after you have it.
- If the new property’s cost is less than the sale price, the exemption only applies proportionally. In less than 6 months, the remaining funds can be re-invested under Section 54EC.
Hot to Calculate your Capital Gains Tax
Profits earned from the sale of capital assets are known as capital gains, The two forms of capital gains tax one is long-term and second is short-term. Short-term capital assets are those held for less than 36 months, whereas long-term capital assets are those retained for more than 36 months.
When you sell a capital asset for a higher price than you bought for it, you earn capital gains. Any investment product, such as mutual funds or stocks, or any real estate product, such as land, houses, and so on, are considered capital assets. A capital gain is an increase in the value of any of these when you sell them. In the same way, a capital loss occurs when the value of an asset falls below its purchase price.
Only when you sell an asset for more than its original purchase price do you have a realised capital gain. a property that has been inherited is not eligible for capital gains. because an inherited property is only a transfer of ownership rather than a sale, If you sell your inherited property, however, you will be subject to capital gains tax.
- Calculate your basis. This is generally the purchase price plus any commissions or fees paid.
- Calculate your realized amount. This is the sale price less any commissions or fees that may have been paid.
- Subtract your basis (what you paid) from the realized amount (how much you sold it for) to Calculate the difference.
- If you sold your assets for more than you paid, you have a capital gain.
- If you sold your assets for less than you paid, you have a capital loss. Learn how capital losses can be used to offset capital gains.
Short Terms Capital Gains Tax
To calculate the Short Term Capital Gains, subtract the cost of acquisition, direct selling expenses, and cost of improvements (if any) from the total Sale Price of the asset, as well as any exemptions allowed under section 54 the resulting amount is the Short Term Capital Gain. For short-term capital gain, the person can benefit from the basic exemption limit of the income tax slabs.
- Indian residents (below 60 years): Income tax will be exempt on short-term capital gain on sale of the property
- Hindu Undivided Family (HUF): Income tax will be exempt on short-term capital gain on sale of the property
- Senior citizens (age 60 – 80 years): Income tax will be exempt on short-term capital gain on the sale of the property
- Super senior citizens (older than 80 years): Income tax will be exempt from short-term capital gain on sale of the property
- Non-Residential Indians: Income tax will be exempt on short-term capital gain on sale of the property
Long Terms Capital Gains Tax
In case of Long Term Capital Assets, The only distinction is that one can deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation is used to apply CII (cost inflation index). Because the purchase price is adjusted for inflation, this raises your cost base (and lowers your gains).
If you use your entire selling profits to purchase a home, you may be able to avoid paying any tax on your profits if you fulfill all of the following criteria.
- Purchase a home within one year of the transfer date or within two years of the transfer date.
- Build one house within three years of the transfer date.
- You don’t sell this home within three years of buying it or building it.
- This new property, whether acquired or built, must be located in India.
- On the date of transfer, you should not own more than one residential house.
- You do not purchase or construct any residential house within two years of such date or within three years of such date.
Capital Gains account Scheme
The government offers tax relief to People who reinvest their capital gains generated by selling an asset, within a certain time period. Taxpayers can park their capital gains in the Capital Gains Account Scheme until they are reinvested.
There are two types of accounts available under the CGAS scheme: savings deposit accounts (also known as Type-A accounts) and term deposit accounts (called Type-B accounts), investors can put their long-term capital gains in a Capital Gains Account Scheme (CGAS) until they are allowed to invest them as defined in Sections 54 and 54F. You can invest the LTCG from the sale of a property in a residential property under Section 54. You can invest the LTCG from the sale of securities in a residential property under Section 54F.
You can only open a CGAS account if you are unable to invest the money in a home before the income tax return filing deadline (July 31 after the given assessment year). This scheme was started in 1988, and accounts can be opened at any of the government’s approved banks. State Bank of India and other state banks, Syndicate Bank, Central Bank of India, IDBI Bank, and Bank of Baroda, are all part of this group. The CGAS facility, however, is not available in these banks’ rural branches.
What is Capital Gain Tax Rate
In India, tax on capitals gains depends on two factors: first the nature of the capital asset and second, the period for which it has been held. Capital Gains Tax on Sale of Property in India is levied depending on the duration for which the property was held by the seller. If the property was held for less than 2 years – it would be Considered as a Short Term Capital gain and if the property was held by the Seller for more than 2 years, it would be Considered as a Long Term Capital Gain. Presently in India from the sale of capital assets, In order to give a boost to start-ups and manufacturing enterprises, the Union government has proposed to cap the surcharge on long term capital gains arising on the transfer of any type of assets – at 15 percent. This proposal was presented on February 1 in the recent Union Budget 2022-23
Capital Gain Tax Rate on Sale of Property
- Short Term Capital Gain Tax Rate As per normal Income Tax Slabs
- Long Term Capital Gain Tax Rate 20%
FAQs on Capital Gain Tax on Sale of Property
Any profit or gain arising from transfer of capital asset is calles capital gain, capital gain tax are two types first Short term capital gain and long term capital gain.
If most investments are kept for at least one year, capital gains taxes are due on the earnings from their sale. Depending on your taxable income for the year, the capital gains tax rate is either 0%, 15%, or 20%.
Capital gains should not exceed the amount invested. If only a portion of the gains were reinvested, the capital gain exemption would only apply to the amount that was reinvested. Assets must be held for a minimum of 36 months.
Yes, NRIs who sell their property in India would have to pay capital gains tax. The tax payable will depend on the fact whether the gain is long term or short term.
For the time that a property is used as a primary residence, it is free from capital gains tax (CGT). If a property is sold within six years of first being rented out, it can continue to be exempt from CGT.