How to calculate Capital Gain Tax on Selling of Property in India?
As the real estate market boomed all across India in the last decade, buying real estate for investment purposes and selling it later at a higher price has become very common among Indians. Although the number of real estate transaction have increased significantly in the last few years but the understanding of the tax implications on these transactions is largely missing. I am writing down this note to clearly understand the tax liability on real estate transactions.
Short Term Capital Gain: If property is held for less than three years before selling it, then it is considered a short-term capital gain (STCG) and one has to pay tax according to your income-tax slabs
Long Term Capital Gain: If property is sold after three years or 36 months, then it's considered long-term capital gain (LTCG) and one has to pay 20% of the profit as tax.
Cost of Acquisition of a Property:
The cost of acquisition of property is the amount paid by buyer to seller for the purchase of property. Besides this also include the expenses Incurred for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp Duty, Registration Fees, and Legal Expenses etc.
Cost of Improvement: Once the property is purchased and the owner makes an renovation to the house; all Capital Expenditures incurred in renovation, additions or alterations to the property are termed as cost of improvement. The cost of improvement is added to cost of acquisition while calculating the capital gains.
When a property is acquired by an Assessee by way of Distribution of Assets/ Total Partition HUF, Under a Gift or Will, By Succession, Inheritance or Devolution, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it. Where the cost for which the previous owner of the capital asset acquired the property cannot be ascertained, the cost of acquisition to the previous owner shall be the fair market value of the asset on the date on which the asset became the property of the previous owner.
COST INFLATION INDEX
While calculating the capital gain the cost of acquisition is indexed to the cost inflation. As the purchasing power of the rupee keeps declining with inflation over the years the gain on sale of property based on the acquisition price fails to reflect the properties true appreciation. The cost inflation index, published by the tax department every year, is used to calculate the indexed cost of acquisition of the property.
If a property is purchased before 1 April 1981, the fair market value on that date is used to calculate the gain.
Indexed Cost = Actual Cost * Cost Inflation Index of the Year of Sale
Cost Inflation Index of the Year of Purchase
As the purchase of property and improvement might happen over different years, the Indexation using the Cost Inflation Index shall be done to the Cost of Acquisition & Cost of Improvement and the resultant figure shall be the Indexed Cost of Acquisition & Indexed Cost of Improvement for the purpose of computation of LTCG.
Full Value of Consideration (Sale Value of Property)
This is the amount for which a property is transferred. It may be in money or money’s worth or a combination of both. Where the transfer is by way of exchange of one asset for another, Fair Market Value of the asset received is the Full Value of Consideration. Where the consideration for the transfer is partly in cash and partly in kind, Fair Marker Value of the kind portion and cash consideration together constitute Full Value of Consideration.
Where the capital asset transferred is land or buildings or both, if the full value of consideration received or accruing is less than the value adopted or assessed by Stamp Valuation Authority the value adopted by such authority would be taken as the full value of consideration.
Calculation of STCG (Short Term Capital Gain) and LTGC (Long Term Capital Gain):
STCG = Full value of consideration - (cost of acquisition+ cost of improvement + cost of transfer)
LTCG = Full value of consideration received or accruing - (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Example: My friend Sunil purchased a property in year 20.08.2000 for Rs 20,00,000/-. He paid Rs. 2,00,000/- for registration of the house in his name, brokerage of 15,000/- and a legal fees of Rs. 5000/-. To accommodate his growing kids he renovated the house in June 2001 and spend Rs. 5,00,000/- on the same. He subsequently sold the house on 20.07.2005 for a sale consideration of 50,00,000/- and also paid a brokerage of 50,000/- at the time of sale. His capital gain looked like this:
Cost of Acquisition – 20,00,000 + 2,00,000 + 15,000 + 5000 = 22,20,000/-
Cost Inflation Index of 2005-2006 = 497
Cost Inflation Index of 2001-2002 = 426
Cost Inflation Index of 2000-2001 = 406
Indexed cost of Acquisition = 22,20,000 * 497/406 = 27,17,586/-
Indexed cost on Improvement = 5,00,000 * 497/426 = 5,83,333/-
Calculation of Capital Gain
Sales Consideration 50,00,000
(Minus) Brokerage 50,000
(Minus)Indexed Cost of acquisition 27,17,586
(Minus)Indexed cost of improvement 5,83,333
Capital Gains 16,49,081
My friend was liable to pay the Long Term Capital Gain (LTGC) on INR 16,49,081/- at the rate of 20%.
Some Interesting Questions:
What if I take the advance for sale of property and the same doesn't go through? If advance is received against agreement to transfer a particular asset and it is retained by the tax payer or forfeited for other party’s failure to complete the transaction, such advance is to be deducted from the cost of acquisition.
Can the interest paid on housing loan be also added to the cost of acquisition of the property while calculating the capital gains? In a recent judgment by the Tribunal in the case of ACIT v C. Ramabrahmam (2012) 27 taxmann.com 104 (Chennai – Trib.), interest on which was claimed as a under section 24(b) [while computing from house ] was also deducted by the assessee under section 48 [as cost of acquisition while computing capital gains from sale of such house property]. Such treatment was upheld by the Tribunal.
What is the ownership for IT purpose? The ownership for Income Tax purpose would be when a person receives the possession. Even if payment is not made but possession is received, it will be treated as a sale transaction.