What is a Capital Gain?
Capital Gains are the profit made on sale of a Capital Asset. Capital Assets include:
- Immovable Property
- Securities e.g. Equity, Debentures, Bonds etc.
- Gold & Jewellery
- Paintings & Art works
Capital Gains can be of the following type:
- Short Term Capital Gain – Gain on sale of any capital asset which has been held for less than 36-months (other than Equity Shares and Equity Mutual Funds – in which case it is 12 months and Immovable Property – in which case it is 24 months)
- Long Term Capital Gain – Gain on sale of any capital asset which has been held for more than the designated minimum period as above (36 months, other than Equity & Equity MF – 12 months and Immovable Property – 24 months)
The Capital Gains are calculated as the Sale Value – (minus) the Indexed Acquisition Value (Indexed Cost)
- Indexed cost is the inflated cost of the asset which is calculated as:
- Index number of year of sale / (divided by) index number of year of acquisition of the asset.
- Indexed cost is essentially the Purchase Value adjusted for Inflation.
What is Capital Gains tax on sale of property?
If an immovable property (residential house, plot or commercial property) is sold when it has been owned for less than 2 years (24 months), short term Capital Gains tax will be payable.
If held for longer, Long Term Capital Gains tax will be payable.
Short Term Capital Gains tax is paid at the normal income tax slab rate that applies to the assessee.
Long Term Capital Gains tax is set at 20%.
How do I save Capital Gains Tax from sale of Property?
- Section 54 : Sale of Property & Purchase of New Property
Any long term capital gain arising from sale of residential house property is exempt to the extent that the amount of such capital gain is invested in
1. Purchase of residential house during the specified period i.e. 1 year prior to or 2 years after the date of the transfer of property.
2. Construction of residential property within 3 years from the date of transfer.
- The period for long-term capital gains on immovable property was reduced from 36 months to 24 months in the Budget 2017-18
- From 1 April 2015, the investment in new residential property is limited to purchase of 1 residential property
- The new property is required to be held for a minimum period of 3-years. In case the new property is sold before the expiry of 3 years from the date of acquisition or construction, then the capital gain on such property will be done reducing the price of acquisition by the by the amount of capital gain exempted earlier.
Capital Gains Account Scheme:
Deposit amount for purchase of new property in a Capital Gains Account under the CGA scheme with an Authorised Bank.
In the event, a new property is to be acquired or constructed, but cannot be done before the due date of filing of income tax returns for the year, then the amount sought to be invested in a new property can be deposited in the special capital gains account. Most Public Sector Banks are Authorised to accept deposits under the CGA scheme.
- The amount deposited under the CGA scheme shall be eligible for exemption as if it has been utilised for purchase/construction of new residential house property
- However, if the amount deposited is fully or partially un-utilised after a period of 3 years from the date of transfer of asset, then it shall become chargeable to tax in that year.
Section 54 EC : Sale of any Capital Asset and Investment in Specified Bonds
Investment in bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) under Section 54EC are eligible to save capital gains tax.
- The maximum amount that can be invested is Rs. 50,00,000 within 6 months of date of sale of property.
In order to qualify for exemption from Capital Gains Tax, the minimum holding period for the bonds is 3 years from the date on which property was sold. In case the bonds are sold prior to the end of 3 years, the amount so invested and for which capital gains exemption was availed, shall become taxable.
The amount must be invested before the returns filing date in order to claim exemption in that financial year.
Section 54F : Sale of any Capital Asset and Investment in New Residential Property
Under section 54F, any long term capital gain from the sale of any capital asset (apart from residential asset) shall be fully exempt from payment of capital gains tax, if the entire net consideration realised from the sale is invested in purchasing of 1 residential house within 2 years or before 1 year from the date of such transfer OR the net consideration is invested in construction of 1 residential within 3 years after the date of such transfer; or exemption shall be on pro-rata basis in case the total amount is not so invested.
LTCG exempted = LT Capital Gain X (Amount Invested / Net Sale consideration)
- In order to avail exemption under section 54F, at the date of such transfer the assese should be in possession of not more than 1 residential house apart from the house that he is investing his capital gain into.
Treatment of Loss on Sale of Capital Asset
In case of loss on sale of Capital Asset (post indexation), the Long Term Capital Loss (LTCL) can be set off from long term capital gain ( LTCG ) arising from sale of any asset (apart from gains arising from sale of shares or mutual funds, on which STT has been paid).
The LTC Loss is allowed to be carried forward for up to 8 years but can be set off under the same head only.