Long Term Capital Gain Tax on Property

When you sell any property that is held for more than 24 months, all profit earned from the sale is accounted for LTCG (long-term capital gain). The calculation of India tax on capital gains requires a proper calculation of the LTCG or profit earned in regard to the original price.

The long-term capital gain value of the property is taxable under the Income Tax Act 1961. The tax rate on long-term capital gain on property is 20% with an addition of surcharge and cess. It is also important to note that this tax rate of 20% is only applicable for all properties sold after 1st April 2017.

Properties inherited by individuals are not eligible for any taxation until the new owner decides to sell the property forward.

The calculation of long-term capital gain after the sale of a property is done using the following formula.

• Final Sale Price of Property - (indexed acquisition cost + indexed house improvement cost + transfer cost)

• To understand this better, let us look at an example below.

• Shreya bought a property in 2018 for ₹50 lakhs.

• She sold the property in 2022 for ₹80 lakhs.

• Let’s assume the indexed acquisition cost + transfer cost came up to be ₹17 lakhs. Other than this, there was no significant improvement to be accounted for.

• Using this, the capital gain for Shreya using the formula above =

₹80 lakhs - ₹67 lakhs

= ₹13 lakhs

• To calculate the capital gain tax, we will multiply the capital gain value x 20%

• Her payable capital gain tax = ₹2.6 lakhs

• Please note that this is a general formula to explain the calculation for long-term capital gain tax on property. For the actual calculation, exemptions under Sections 54, 54B, 54G, and 54EC are also subtracted from the capital gain value before the tax rate is applied.

• For ease of calculation, we recommend using a property gain tax calculator in India, as it mitigates the chances of human error.

Under Section 54

• As per Section 54 in the Income Tax Act, you can benefit from tax exemption on your long-term capital gains on property if you reinvest the earned capital gains into 2 properties. However, there are certain terms and conditions to remember, and they are as follows.

• An assessee can only avail of this exemption once in their lifetime.

• The total of the capital gains should not exceed ₹2 crores.

• Assessees are only allowed to reinvest their capital gains and not the income earned from the sale of the property.

• The assessee must purchase the 2 new properties within 2 years after the sale of the property or 1 year before the final sale.

• If the new properties purchased by the assessee sell out within 3 years, the exemption under this section can be cancelled.

• An assessee can also reinvest the earned capital gains towards the construction of a property. However, this is only applicable if the construction of the new property is completed within 3 years from the sale date of the older property.

Under Section 54B

• As per Section 54F of the Income Tax Act, you can avail of tax exemption for capital gains if the property sold is for an agricultural reason and is outside of the rural areas. Other than this, the other criteria include the following -

• Capital gains earned from the sale of an agricultural land must be reinvested in another agricultural land within 2 years from the date of sale.

• The reinvestment must take place before the assessee files their tax returns for the ongoing financial year. If the assessee fails to do so, they can deposit the capital gain amount into a bank and reinvest it within 2 years to avoid converting these gains into short-term capital gains and losing the exemption benefit.

• If the newly purchased agricultural land is sold within 3 years, the tax exemption may be cancelled.

Under Section 54F

• As per Section 54F of the Income Tax Act, you can avail of tax exemption for capital gains under the following circumstances -

• Instead of the requirement of reinvestment of the capital gains, for this exemption, you must reinvest the entire sale proceeds towards the purchase of 2 housing properties within 24 months from the date of sale.

• The capital gain earned should be from long-term assets other than housing property sales.

• The capital gains and the total sale proceeds can also be reinvested towards a construction project, provided the construction work is completed within 3 years from the date of sale.

• If the assessee does not reinvest the entire lump sum amount in a new property or two, the tax exemption under this section will only apply to the reinvested amount, not the entire earned sale proceeds and capital gains.

Under Section 54EC

• As per Section 54EC of the Income Tax Act, you can avail of tax exemption for capital gains under the following circumstances -

• The capital gains earned from a property sale must be reinvested in bonds provided by the Rural Electrification Corporation or the National Highway Authority of India.

• The investment amount should be less than or equal to ₹50 lakhs only.

• The reinvestment procedure must take place either within 6 months from the sale date or before the assessee files their tax returns for that particular financial year.

• If the assessee does not reinvest the earned capital gains before filing their tax returns, they can deposit the capital gain amount into one of the banks listed under the Capital Gains Account Scheme.

• However, the assessee must invest the deposited money within a maximum of 2 years from the sale date to avoid the risk of losing the exemption benefits.

Other than long-term capital gain exemptions under different sections, you can also avail of tax deductions from your investments towards premiums for a health insurance plan.

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