Capital gains tax on property

Capital assets are assets that are expected to generate value over a period of time. Real estate, vehicles, gold, stocks, bonds, and other financial instruments are common examples of capital assets. These assets can be classified as movable, immovable, tangible and intangible. You can invest in any of these assets to potentially build wealth over time.

Capital gains are the profit you earn by the sale of a capital asset. In simple terms, it is the difference between the asset’s sale and purchase value. The higher the sale value, the higher will be your gains. You are required to declare these gains when filing income tax returns for the financial year. These gains are taxable and attract capital gains tax.

As the name suggests, capital gains tax is the tax levied on your capital gains. The applicable tax differs for your asset type and its holding period. The article highlights key pointers about capital gains tax on property. But before we get into specific details, let’s first understand the types of capital gains and their associated tax laws.

Types of capital gains:

The holding period is the time period for which you hold the asset. It is a key determinant of your investment’s risk and returns. Based on the holding period, capital gains taxes can be classified into two types – short-term capital gains tax and long-term capital gains tax.

Short-term capital gains (STCG)

Short-term capital gains are the gains you earn within a short time frame, typically less than 36 months. The holding period and applicable taxes vary for various assets.

Long-term capital gains (LTCG)

Long-term capital gains are the gains you earn on selling an asset after holding it over a brief period of time, generally more than 36 months. Similar to STCG, the holding period and applicable taxes vary for various assets here too.

Note, if the asset is inherited, the holding period of the previous owner will be considered too. The holding period of bonds and other similar instruments is considered from its allotment date.

Understanding capital gains tax on property:

As mentioned, your capital gains attract taxes. Similar to capital gains, its taxation can be classified into two types – Short-term Capital Gains (STCG) and Long-term Capital Gains (LTCG). The tax rate and conditions associated with tax law differ for different assets.

The property can be classified into two types, movable and immovable property. The holding period to determine the capital gains tax varies on both these types of properties. Movable properties include jewellery, machinery or royalty, while immovable properties include buildings and houses among others.

The following table highlights the capital gains tax on property investments:

From the above table, it can be seen that if movable properties are sold at a profit within 36 months of acquisition, the gains are subject to short-term capital gains, which will be included in the taxable income and taxed as per the individual slab rate.

If the holding period of movable properties is more than 36 months, the gains are considered long-term capital gains and taxed at 20% plus cess at 4%, with indexation benefits.

Meanwhile, in the case of immovable properties such as buildings or houses, if the holding period is less than 24 months, the profit made is short-term capital gains and is taxed as per the income tax slab rate. If the duration is more than 24 months, the gains are considered long-term capital gains and taxed at 20% plus 4% cess, with indexation benefit.

Note, in both conditions the property should have been sold after 31^st March 2017 for the tax law to be applicable.

Ways to save on capital gains tax on property:

If you are wondering how to save on capital gain tax on sale of property, making a tax-deduction claim under the following sections can be helpful:

Section 54EC

You can claim a tax deduction under this section if the capital gains obtained from the sale of a property are reinvested in specific capital gain bonds. The following conditions are also to be met:

• The investment amount cannot exceed Rs 50 lakh.
• The investment cannot be redeemed within five years from its sale date.
• The investment should be made within six months from the sale date or before the filing of income tax returns for the same financial year.

Section 54F

You can claim a tax deduction under Section 54F if the capital gains are earned from any long-term asset other than a housing property. The following conditions are also to be met:

• The capital gains should be reinvested in a maximum of two housing properties.
• The investment should be made one year before or two years after the sale.
• If the investment is made in an under-construction project, it should be completed within three years from the sale date.