How much Capital Gains Tax you need to pay on sale of Property in India?

Capital Gains Tax

This tax is to be paid on the sale proceeds, whenever you sell of your property or physical assets like gold and jewellery at a profit. Capital Gains is broadly divided into two parts namely Short-term Capital Gain (STCG) and Long-term Capital Gain (LTCG).

Short-Term Capital Gains

Short-Term Capital Gains are applicable when the asset is sold before completion of 36 months from the date of purchase of the asset.

STCG is added to the taxpayer’s taxable income for the financial year in which the sale was made. Income tax is charged on those gains according to the individual’s marginal (highest) tax slab rate.

Equities and equity mutual funds are exceptions to the above rule. For these asset classes, short-term capital gains are applicable only when holding period is less than 1 year and are taxed at 15%. If held for more than 1 year, Long Term Capital Gains are applicable for equities and equity mutual funds.

Example 1

You purchased a house in March 2015 for Rs. 50,00,000 and sold it in Jan 2017 for Rs. 55,00,000. This will be considered as Short term capital gain as the period of holding the asset is less than 36 months. In this case, the capital gain would be added to your income and taxed based on the tax slab applicable on your income.

Short Term Capital Gains = Rs. 55,00,000 — Rs. 50,00,000 = Rs. 5,00,000

If your annual income exceeds Rs. 10 lakh, then

Income Tax on STCG = 30% of Rs. 5,00,000 = Rs. 1,50,000

Long-Term Capital Gains

Long-Term Capital Gains are applicable when the asset has been held by the taxpayer for more than 36 months. In the above scenario, if the property had been purchased in March 2000 then it will be considered as Long-term capital gain.

LTCG is charged at the rate of 20% with indexation benefit. Indexation benefit is explained in the following section. LTCG is taxed at these rates irrespective of one’s tax slabs.

Equity and equity mutual funds are an exception to the above rule. LTCG is applicable on equity and equity mutual funds if the holding period is more than 1 year. LTCG above Rs. 1 lakh in a financial year on equity and equity mutual funds are taxed at 10%. Indexation benefit is not available here.

Indexation

While calculating the long-term capital gains on sale of property, other physical assets and debt mutual funds, the benefit of indexation is given. To calculate the gains, the buying price of the asset is increased as per the Cost Inflation Index (CII) to arrive at Indexed Cost of Acquisition. This is done to reduce the gains by the impact of inflation. Cost Inflation Index is a number published every year by the govt. to reflect the average inflation in that financial year.

Note: If the property is purchased before 1981, CII of 1981–82 is considered. If improvement is done before 1981, that cost is never considered.

Long-term capital gain with the help of indexation is calculated this way:

LTCG = Full value of consideration — (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Here,

indexed cost of acquisition = cost of acquisition * CII of the year of transfer/ CII of the year of purchase.

indexed cost of improvement = cost of improvement * CII of the year of transfer/ CII of the year of improvement.

Example 2

You bought an apartment for Rs 5,00,000 in 2005. In January 2015, you sold it for Rs 15,00,000. )

This means, you need to pay capital gain tax on Rs. 4,35,000.

Capital Gains Tax = 20% of Rs. 4,35,000 = Rs. 87,000