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:

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:

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:

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.