Capital Gains on House Property: Calculation & Tax Planning

All about Capital Gains on House Property:

untitled-design-2-1-5230500Capital gains are the gains/ profit earned on transfer or sale of assets. In the article below, I will take you through the capital gains on housing property, how is the short-term and long-term capital gain calculated, applicable tax rates on the sale of property and how you can save taxes on the sale of property.

Capital Gains on Land/ Housing Property

Any gain or loss arising on transfer or sale of a land/ house property held for more than 36 months is known as long-term capital gain/ loss and such a property fall under long-term capital assets.

On the other hand, property held for less than 36 months belong to the category of short-term capital assets and any gain/ loss arising on transfer or sale of such property is known as short-term capital gain/ loss.

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Budget 2017 has brought smiles on the face of the HNIs on two counts. The holding period of the property has been reduced to 2 years from 3 years.

Applicable tax rates on transfer/ sale of property

• Short-term capital gains are taxed according to the income tax slab rate of the property holder.
• The implied tax rate on Long-term capital gain is 20%.

Computation of Short-term Capital Gains on sale of property

Computation of short-term capital gains
Computation of Long-term Capital Gains on sale of property

Computation of long-term capital gains

Through indexation, the cost of acquisition is adjusted for the inflationary rise in the value of assets and its benefit is available only for the long-term capital assets. For computing the indexed cost of acquisition, the factors to be considered are:

• Year of acquisition/improvement
• Year of transfer/ sale
• Cost inflation index for the year of acquisition/improvement
• Cost inflation index for the year of transfer

Let me illustrate this with an example:

Mr. Raghav Raman bought a property for Rs. 90,000 in May 2004 and sold it in Apr 2016 for Rs. 15,150,00 paying a brokerage of Rs. 15,000. Computation of capital gains in such a scenario will be as follows:

long-term capital gain calculation illustration
Indexed Cost of Acquisition =

(Purchase Price or Cost of Acquisition ) * { (Cost Inflation Index for the year of transfer of capital asset or CII for the year of sale) / (Cost Inflation Index for the year of acquisition or CII for the year of purchase) }

CII for the year 2004-05 = 480
CII for the year 2016-17 = 1125
Cost of Acquisition/ Purchase Price = Rs. 500,000
Indexed Cost of Acquisition = 90000 * { (1125/ 551) } = 90000 * 2.04 = Rs. 1,83,600

You can see from the above table; Gross long-term capital gain is Rs. 13,164,00.

Budget 2017 has changed the base year for calculating Indexed Cost of Acquisition from 1 April 1981 to 1 April 2001.

Adjusting Short-term & Long-term Capital Gains against the basic exemption limit

This is function of the residential status of an individual.

In the case of STCG, only a resident individual/ resident HUF can adjust the exemption limit against STCG covered under section 111A. This is possible only after making an adjustment to other income. In other words, income other than STCG covered under section 111A has to be first adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against STCG covered under section 111A. A non-resident individual/HUF cannot adjust the exemption limit against STCG covered under section 111A.

The above rule is applicable for long-term capital gains as well.

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Sale of an inherited property

Selling a property that has been inherited or received as a gift is also eligible for capital gain taxation even though there is no cost incurred in acquiring such property. The capital gains in such a scenario will be calculated by taking into account the cost incurred by the previous owner, indexed to the year of acquisition.

Adjusting Capital Loss

The capital loss arising on the sale of the property in a particular year can be adjusted against the capital gains in the same year. In case of non-adjustment of loss in the same year, it may be adjusted any time during the next eight years, provided that the return was filed before the due date.

However, as the Budget 2017 becomes effective from 1 April 2017, the upper limit of capital losses has been fixed at Rs 2 lakh.  Additionally, the unadjusted losses can be carried forward for 8 assessment years; but the adjustment is allowed only against the head income from house property.

For more details on impact of Budget 2017 on your tax liability, visit Should you invest in a second home or not

Saving Capital Gain Tax on sale of property

No deductions for short-term capital gains are allowed under section 80C to section 80U if the gains fall under section 111A. On the other hand, you can save tax on long-term capital gains through various ways by claiming deductions under various sections.

1. By Purchasing or Constructing a new House (Exemption available under section 54/ 54F)

 If the sale is of House/ Residential Property

You can save tax on capital gains arising from selling a house or residential property, by buying or constructing a new house or residential property. The exemption is available under section 54 of the IT Act, 1961.

Some of the important points to know under this option are:

• The benefit is available only to an individual or HUF.
• The new property has to be bought within two years after the sale/transfer of the old house or one year before the sale/ transfer of the old house.
• If you are planning to build a new house, the construction has to be completed within three years from the sale of the property. The cost of land is included in the construction cost when you buy a plot to build the house.
• Buying an under-construction property is also eligible for tax deduction provided the construction is completed within three years of the transfer of the old property.
• The deduction allowed is; lower of the capital gain or the actual investment.
• If you sell the newly acquired property within three years of construction or purchase, the deduction will be reversed, and short-term capital gain tax would be applicable.
• If more than one house is purchased or constructed, the exemption is available for only one property under section 54.
• There is no exemption available if the house is purchased outside India.

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 If the sale is of Land or any property other than the Housing Property

In case of capital gains arising from the sale of land, you can buy a new house or construct a new house to save tax. You will be eligible for the complete exemption, if the entire money is used in the purchase of a new house or construct a new house under section 54F of the IT Act, 1961.

Some of the important points to know under this option are:

• The benefit is available only to an individual or HUF.
• If only the part of the money is used, the deduction will be the proportion of the invested amount to the sales price.
• The applicable time frame is same as that for the sale of the residential property.
• The residential property owned by you should not be more than one, prior to this investment.
• If you buy another house within one year from the transfer of sale of the original assets or construct a new property within three years, the capital gain deducted will be taxable.
• If the newly bought property is sold within three years, the deducted claim will be taxable as a long-term capital gain.

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2. By investing in Capital Gain Account Scheme

If you want to buy the property at a later stage and save tax on your capital gain, this is the option you can opt for. You can deposit your capital gains under Capital Gain Account Scheme in any of your public sector bank accounts; this will serve to inform your taxman that you are not planning to buy a property now, but at a later stage.

Some of the important points for subscription under this scheme are:

• The benefit is available only to an individual or HUF.
• The amount has to be deposited before filing your tax returns in the same year in which the sale is made.
• The deposited money can only be used in the purchase of a new house or construction of a new house within the specified time frame.
• If the amount deposited in the Capital Gain Account Scheme is not utilised for purchasing or constructing a new house within the specified time frame, the unutilised amount shall be taxed as income by way of long-term capital gains once the specified time frame gets over.
• The specified time frame could be two or three years.

3. By investing in Specified Bonds (Exemption available under section 54EC)

If you already possess a house and do not want to purchase another one, this is a good choice. Capital gains arising from the sale of long-term assets can be invested in specified bonds also known as Capital Gains Bonds under section 54EC of the IT Act, 1961.

Some of the important points for subscription to such bonds are:

• Resident Individuals, Hindu Undivided Families, Non-resident Indians and approved institutions can invest in these bonds.
• The amount has to be invested in the capital gains bonds within six months of the transfer of assets or before filing the returns, whichever is earlier.
• Rural Electrification Corporation and National Highways Authority of India issue these bonds.
• The minimum and the maximum investment allowed during a financial year is Rs. 10,000 and Rs. 50 lakhs respectively. The tenure is three years.
• They cannot be transferred into another person’s name.
• The exemption available is; lower of the capital gain or the investment amount.
• There is no TDS on the interest paid. However, the interest earned is taxable, and the tax has to be paid on the interest income as advance tax.

4. By investing in Start-ups (Exemption available under section 54EE/ 54GB)

As per Union Budget 2016, you can save tax on capital gains by investing in start-ups through direct or indirect mode.

You may choose to invest in funds-of-funds under section 54EE, which will in turn invest in start-ups. However, investing in such funds comes with the below-mentioned conditions:

• The maximum amount that can be invested is Rs. 50 lakhs.
• There is a lock-in of three years.
• The tax benefit will be reversed in case of premature withdrawal.

You can also directly choose to invest in an eligible start-up and avail tax exemption under section 54GB. The predefined conditions under this option are:

• The individual should be the majority shareholder in the start-up or hold more than 50% shares in the start-up.
• The amount shall be utilised by the start-up for the purchase of  new assets before the due date for filing tax returns.

However, these options carry a high degree of risk as the investment is into a new venture. At one end, there is a chance of higher payouts in the later years, on the other side there is an equal possibility of your capital getting eroded.

Also read: Capital Gains Tax – The long and short of it

Final Words

Tax planning is an important part of financial planning. Therefore, evaluating tax implication on capital gains and choosing the right option will certainly help you reduce the tax burden.

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1 thought on “Capital Gains on House Property: Calculation & Tax Planning”

  1. Hello

    Pls advise capitax gains in the below context

    1. Apartment A purchased in 2004 , all loans closed , currently rented out

    2. Apartment B sale agreement done in 2013, registered in Mar 2015 , Moved in July 2016 , currently living here, still under home loan.

    I want to sell Apartment A and purchase a new apartment C which is under construction, registration for C will be done in Jun 2018 . I will eventually move into C (and rent out B)

    Assume all apartments are in single name and no joint ownership.

    Currently I am showing rental income of A and adjusting against interest component of B.

    Can I invest sales proceeds of A into C to avoid capital gains tax using normal indexation?

    Thanks

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