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Capital Gains Tax on Property: Know What is & How are they Taxed

Capital Gains Tax on Property: Know What is & How are they Taxed

If you are looking at houses or property as an investment, it’s best to have at least a basic knowledge of taxation.

When you sell your house or property, the chances are high that you would do it only if you make some profits. Isn’t it? While there can be a financial crisis, generally, people sell property only when they profit from it.

Profit on the sale of capital items is termed capital gains. It is one of the most sought after investment methods. The profit is calculated after considering the inflation and the indexed acquisition cost. And these capital gainsare taxed differently depending on the holding period of the property. Let’s take a look at the capital gains tax on real estate.

  • Gains made on the sale of property in possession for less than 2 years are termed as short-term capital gain (STCG).
  • Gains made on the sale of property in possession for more than 2 years are termed as long-term capital gain (LTCG).

Additional Read: How to Calculate Capital Gains on Property

Both STCG and LTCG capital gains tax on property are taxed differently. Here’s how you can calculate STCG:

Step 1: Begin with a full value of consideration.

Step 2: Deduct the following costs:

  • Cost of acquisition
  • Cost of improvement
  • Expenditure incurred exclusively and wholly in connection with such transfer

Therefore, Short term capital gain = Full value consideration- the cost of acquisition- the cost of improvement- expenses incurred exclusively for such transfer.

Furthermore, short-term capital gains are added to the seller’s total income from all sources and taxed according to their tax slab.

Now, here’s how you can calculate LTCG:

Step 1: Begin with the full value of consideration

Step 2: Deduct the following:

  • Indexed cost of improvement
  • Expenditure incurred exclusively and wholly in connection with such transfer
  • Indexed cost of acquisition

Step 3: From the result, deduct exemptions provided under sections- 54, 54EC, 54F, and 54B

Moreover, in long-term capital gains, the seller has to pay 20% tax on gains after indexation.

Additional Read: What Are the Expected Changes in Taxation on Home Loan in 2021?

Let’s take an example to understand this.

Suppose you borrowed a home loan to purchase a property for Rs. 25 lakhs, and now it is being sold for Rs. 50 lakhs.

If the period of holding the property is less than 2 years and you are in the 30% tax bracket, your tax on the sale of this property will be 30% of (Rs. 50 lakhs – Rs. 25 lakhs), i.e., Rs. 7.5 lakhs.

Now suppose the period of holding was 5 years. The property was bought in 2011-12 (index – 785) and sold in 2016-17 (index – 1125).

So now, the indexed cost of property is (1125/785) x Rs. 25 lakhs = Rs. 36 lakhs.

The effective capital gains are Rs. 50 lakhs – Rs. 36 lakhs = Rs. 14 lakhs. This is taxed at 20%, i.e., 20% of Rs. 14 lakhs that is Rs. 2.8 lakhs.

Hence, there’s a considerable benefit of waiting more than 2 years to sell your property and reduce your tax outgo.

Wondering how you can calculate capital gains in a few seconds? By using a capital gains tax on property calculator!

In summation

Lastly, if you are looking for home finance to purchase your next abode, look no further. Tata Capital’s attractive home loan interest rates and flexible offerings help make your dream home a reality.

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