Capital Gains Tax on Real Estate

Real Estate includes land and building, which are always appreciated. Hence, awareness regarding capital gains tax on real estate is significant. The holding period of the asset determines the capital gains tax.

Property is a capital asset. Any profit arising on its sale and transfer attracts capital gains tax. There are two types of capital gains on real estate depending on the holding period:

1. Short-term capital gain- If one holds land or building for less than or equal to 24 months, it becomes a short-term capital asset. Gains from such assets are known as Short-term capital gains. Moreover, short-term capital gains on real estate are taxable as per the income tax slab rates.
2. Long-term capital gain- If one holds land or building for more than 24 months, it attracts a long-term capital gains tax. Gains from such assets are known as Long-term capital gains. Moreover, long-term capital gains on real estate attract a 20% tax. Additionally, 4% health and education cess is also applicable.

Calculation of short-term capital gains tax on real estate

• Firstly, consider the sale value of the property.
• Secondly, deduct transfer expenses like brokerage from the sale value. The net amount is the net sales consideration.
• Further, deduct the cost of acquisition and improvement from the net sales consideration to arrive at short term capital gains on real estate.
• Lastly, add the short-term capital gain income to the total income and tax it according to the income tax slab rates.
• Also, the cost of acquisition is the property’s purchase price. Hence there is only one amount.
• However, the cost of improvement means repairs on the property till its sale. Hence, there can be more than one amount.

For example, Mr X bought a house at 50 lakhs on 1^st January 2021. He sold the house on 1^st February 2022 for 75 lakhs. He paid brokerage charges worth ₹50,000.

Mr X holds the asset for less than 24 months. Therefore, it is a short-term capital asset.

Now, short-term capital gains on real estate are taxable as per the income slab rates. Let’s assume that capital gain was the only income for Mr X in FY22. Hence, the tax on short-term income from capital gains:

Therefore, the short-term capital gains tax on real estate for Mr X is ₹5,69,400.

Calculation of long-term capital gains tax on real estate with exemptions

• Firstly, consider the sale value of the property.
• Secondly, deduct transfer expenses like brokerage from the sale value. The net amount is the net sales consideration.
• Further, deduct the indexed cost of acquisition and improvement from the net sales consideration. One can avail of the indexation benefits only if the property is held for more than 24 months. It increases the cost of the property, which eventually reduces the tax.
• Indexed Cost of Acquisition/Improvement = CII of current previous year/CII of year of acquisition/improvement* Cost of acquisition/improvement. Remember, CII starts with 2001-02. Hence, ignore all the costs of improvement before 2001-02. And if the property was purchased before 2001-02, consider the fair market value as of 1/4/2001.
• Moreover, exemptions under section 54 are applicable for income from long-term term capital gains. It is applicable if one purchases a new residential property within three years of the sale of the old property or deposits the capital gains amount under the capital gains accounts scheme within three years of sale. Also, exemptions are not applicable for an open plot of land.
• Lastly, long-term capital gains on real estate attract a 20% tax. Additionally, 4% health and education cess is also applicable.

Example of long-term capital gains tax on real estate

Mr X purchases a property in November 1995 for 12 lakhs. The Fair Market Value of a property as of 1^st April 2001 is 20 lakhs. The property was sold for ₹ 90 lakhs on 31^st July 2021. The transfer expenses were ₹25,000. Improvements worth 50,000 were made in May 2020. Later, Mr X constructs a new residential house on 10^th February 2022 for 1 crore. Consider the previous year as 2021-22 and the assessment year as 2022-23.

Mr X holds the asset for more than 24 months. Therefore, it is a long-term capital asset.

CII for 2001-02= 100, 2020-21=301, 2021-22= 317.

Ignore the purchase price as CII for 1995 is not available.

*Indexed Cost of Acquisition/Improvement = CII of current previous year/CII of year of acquisition/improvement* Cost of acquisition/improvement.

Indexed Cost of Acquisition

COA= 20,00,000 (FMV as on 1/4/2001)

Indexed COA= CII of 2021-22/CII of 2001-02*COA.

= 317/100*20,00,000

= ₹63,40,000

Indexed Cost of Improvement

COI= 50,000 (May 2020)

Indexed COA= CII of 2021-22/CII of 2020-21*COI.

= 317/301*50,000

= ₹52,658

*Also, the exemption is applicable as the new residential property was purchased within three years of the sale of the old one.

There is no income from long-term capital gains. Hence, the tax on long-term capital gains is nil.

However, if Mr X did not purchase any new residential property, the long-term capital gains income would have been ₹63,92,658. Later, on this amount, 20% tax and 4% education and health cess would have been applicable.

TDS on the sale of a property

On the sale of a property, the buyer needs to deduct 1% TDS on the sales consideration when the selling price exceeds 50 lakhs. The buyer must deposit the TDS amount with the tax authorities on the seller’s behalf to claim credit for the payment. From 1^st June 2022, one should deposit the TDS amount within 30 days from the end of the month when the sales transaction was made. The seller must link his PAN number so that the payment gets reflected on the seller’s Form 26AS under Part F. The seller must also obtain a TDS certificate under Form 16B from the buyer.