The capital gains tax on the sale of the property is 20% if you own the asset for longer than three years. However, your taxes will be determined according to the tax bracket that applies to you if you sell the property within three years.
How is property capital gains tax determined?
The formula for computing long-term capital gains: CGT Calculation
Cost of Reforms x Cost Inflation Index of the Year of Transfer/Cost Inflation Index of the Year of Reform = Indexed Cost of Reforms.
Short-term capital gains are taxed as regular income, which can be as high as 37%, if you sell a home or piece of property in less than a year. Depending on your income tax bracket, long-term capital gains on properties you've owned for longer than a year are normally taxed at a rate of 15 or 20%.
If you recently sold a property, you must pay tax on it. Therefore, it's crucial to understand how to determine the tax obligation on any profit from the sale of a certain type of property. Consequently, we're going to explain to you today through this blog how taxes on property sales are calculated and what taxes are due on the profit made from selling the property.
The following taxes must be paid by the seller upon sale of the property:-
Due to the seller's capital gains from the sale of the property, this tax (Tax on Property Sale) must be paid by the seller. Based on the profit realised at the time of sale, capital gain tax is due.
Whether you sell the property within three years of possession or after three years will determine whether capital gains tax is due. The capital gains tax on the sale of the property is 20% if you own the asset for longer than three years. However, your taxes will be determined according to the tax bracket that applies to you if you sell the property within three years. Long-term capital gains on real estate sales are taxed at 20% plus a 3% cess.
After the sale of the property is finalised, the TDS deduction is made. It was put into effect by the government on June 1, 2013. Accordingly, the buyer is required to deduct TDS at a rate of 1% from the agreed-upon sale amount before paying the seller the remaining balance. The purchaser is in charge of depositing this TDS sum with the Income Tax Department. This money is not paid out of the buyer's own pocket. You, as the seller, indirectly pay this 1% tax, which may or may not be included in the property sale agreement.
No matter what state your property is located in, keep in mind that all taxpayers are compelled to pay TDS on the sale of property. Keep in mind that only transactions with a value of Rs. 50 lakh or higher are subject to 1% TDS. On the sale of real estate valued at less than Rs. 50 lakh, 1% TDS is not applied.
Some indirect taxes are also payable, which are lodged by the vendor but are actually paid by the buyer. These are paid to you by the buyer, who then deposits them with the government. These taxes are:
1. Service tax
2. VAT
Service tax on the sale of an under construction property: If the property is under construction, then you will have to pay service tax to the government on the sale of the property. Service tax will be either 3.75% or 4.5%, depending on the square footage and transaction value. The buyer has to pay this amount to you, i.e., the seller, which he deposits with the government. You do not need to pay this tax if the construction of your property has already been completed. Remember, all taxpayers have to make this payment, irrespective of the state in which their house is located.
VAT: VAT is a tax that is levied by the state government. Some states pay VAT on the sale of under-construction property, while others do not. Thus, the VAT on the sale of your home would entirely depend on the state in which your property is situated.
If you compute the total tax on property sale payable on the sale of the property, it is very substantial. You are undoubtedly thinking about how to save tax on the sale of property. You must be looking for a solution to avoid paying higher taxes. So let's inform ourselves what exemption the government has allowed for this.
Under Section 54 of the Income Tax Act of 1961, individuals and HUFs can save tax on capital gains or profits. The easiest way is to buy another property with the profits from the sale of this one. This cash should be invested for a maximum term of 3 years from the date of sale. However, this form of investment is allowed just once per individual.
Let us look at two examples related to this to help you understand it and see what other options you have for investing.
Example 1: Rohit purchased a property in the year 2017 for Rs. 80,00,000/- and sold it in the year 2022 for Rs. 1,00,00,000/-. It is a residential property and is classified as a long-term capital asset, as the property has been held by him for more than 3 years. So how might Rohit save tax on the sale of her property? Rohit can receive a tax benefit under Section 54 if she invests in a new property in any of the following ways:
Exp1. Rohit could buy the new property one year before the sale of the old property, i.e., in the year 2019.
Exp2. Rohit can buy the new property after two years, i.e., in the year 2022, after the sale of the existing property.
Exp3. Rohit can construct a new property or purchase a plot within 3 years, i.e., by the year 2023.
Can Rohit own two residential properties and yet receive exemptions on both? Yes, as long as the total cost of both homes does not exceed Rs 2 crore.
Example 2: Gautam sold a property in 2020 for 3 crores, which he had bought in 2009 for 1 crore. He can invest in two residential properties worth Rs 1 crore each in a single year (2020) and obtain tax benefits. If Gautam sells the property for 7 crores with a capital gain of 6 crores and invests in two residential properties for 3 crores each, he will be able to avoid tax on up to 2 crores and on only one residential property.
If you are not able to construct a house or invest in any property immediately after obtaining capital gains, you can deposit the amount of profit under CGAS in a public sector bank. CGAS is the abbreviation for "Capital Gains Account Scheme." This can happen only if you are planning to invest in another residence in the near future.
Remember, you only get 3 years to buy or construct a second property. Otherwise, a only get 3 years to buy or construct a second property. Otherwise, a 20% tax and 3% tax on long-term capital gains will be imposed on the sale proceeds deposited with the bank. With effect from the 2020-21 fiscal year, the benefit of exemption is available on the purchase of two residential properties not exceeding Rs 2 crores. Please note that if you buy a shop or commercial property, no advantage under Section 54 is available.
The government grants another possibility to save tax on property sales under Section 54EC of the Income Tax Act, 1961, but only if it is a long-term capital gain. Through this, after selling your property, you can invest in these financial assets, which will shield your hard-earned capital gains from taxation. Under 54EC, one has to invest his money in notified bonds within six months of receiving the sum.
Such bonds are offered by the NHAI (National Highways Authority of India) and the Rural Electrification Corporation (REC). You are authorised to invest a maximum of INR 50 lakh in these bonds in each financial year. Remember, if you transfer your bonds or take a loan within three years of investing in these bonds, you will be charged capital gains tax. In other words, there is a lock-in period of 3 years when you invest in these bonds.
For whatever reason, no one wants to pay a large portion of the profit obtained from selling their property as tax. Therefore, while evaluating how to sell the home and who will be the buyer, consider strategies to cut taxes. So keep all the aforementioned points in mind before signing the agreement to sell the home.
Under the present income tax legislation, the holding period, i.e., the time during which you owned the property before selling it, plays a crucial role in assessing the tax due. If the law recognises the transaction as short-term capital gains (STCG), then the tax liability will be larger. However, if the transaction falls under long-term capital gains (LTCG), you will be charged 20.8% of the earnings as tax. The LTCG tax of 20.8% is applicable irrespective of your tax slab.
To be free from Capital Gains Tax (CGT), it is important that the individual who has bought the new property should not have any other residential property in his name. If the person owns more than one property, it signifies that the capital gains tax benefit has already been taken advantage of on the amount invested by him in purchasing the new flat. One can also invest in the Capital Gains Account Scheme (CGAS) to save capital gains tax. The last day to invest in the Capital Gains Account Scheme is July 31, 2021. Capital gains tax cannot be exempted on this amount by investing in a time deposit at the post office.
The law also imposes restrictions on the timing, place, and holding period for the purchase of a new property. Firstly, the new property should be purchased one year before the sale or two years after the sale of the main property. If you are building your own house, construction should be completed within three years of the sale of the property. Second, the property you are buying or building should be located in India. If you sell the new property within 3 years from the date of acquisition, the tax exemption will be reversed. The profit earned from selling the property will be recognised as a short-term capital gain.
Another aspect to notice is that there are various tax exemptions available under the IT Act if the transaction is classified as long-term capital gains. In the case of short-term capital gains, the opportunity for decreasing the tax burden is essentially non-existent. The tax payer can only gain against any short-term losses from the sale of assets like stocks, gold, etc.
If you convert the proceeds of the sale of the old asset into a new asset within a specific time frame, subject to certain restrictions and conditions, your tax burden will be significantly reduced or eliminated.
A person who has multiple properties will always have to pay more tax. If someone has only one property, then this is not true in his case. In the rest of this post, we will talk about some unique provisions that will prove this item.
If you sell the property after two years of acquisition, then the profit from its sale will be classified as a short-term capital gain and will be taxed as per your tax bracket.
The application of the deduction under Section 54 will arise only if you sell the property after two years of its purchase. In this approach, you will earn long-term capital gains. In this situation, the profit will be taxed at a rate of 20.8 percent with the advantage of indexation. You will gain an exemption under Section 54 if you complete specific conditions. These are the terms:
1. You can repatriate capital gains from the sale of property to buy or construct two residences. It is crucial to remember here that before Budget 2019, this property was limited to only one property, but it was enlarged to two properties. If you are reinvesting the income in two properties, the deduction would be granted only if the capital gain on the sale of the properties does not exceed Rs. 2 crore. The seller should also understand that he can claim this advantage only once in his life.
2. To claim an exemption on the entire long-term capital gains amount, the entire profit should be reinvested in a new property. If this does not happen, then the exemption will be limited to the amount invested. Assume you make Rs 20 lakh from the sale of your property. If you buy a new house for the same Rs 20 lakh, the entire sum will be tax-free. If you spend Rs 15 lakh to buy a new home, the remaining Rs 5 lakh is taxed.
3. To increase the deduction limit, all related expenditures involved in the purchase of new property, such as stamp duty, registration fee, and brokerage fee, should be included in the cost of the new house. Similarly, the amount spent on repairs and improvements can also be included in the overall purchase cost when determining long-term capital gains.
Capital gains are eligible under Section 54 if you have taken a home loan to buy a new property or to repay an old one.
Indexation benefits on capital gains on the sale of property
Indexation is the process of adjusting the purchase price of a property for inflation. The advantage of indexation is that it enables the seller to factor in the effect of inflation on the past cost of a purchase.
Question 1: Is TDS levied on the total transaction value or the balance amount that exceeds 50 lakhs?
Answer: If the total transaction value exceeds 50 lakhs, the transaction is subject to TDS, which is calculated on the total transaction value.
Question 2: For how long can one invest in government bonds under Section 54EC to receive tax exemption?
Answer: You should invest in government bonds of the National Highways Authority of India and the Rural Electrification Corporation within six months of your capital gain before filing your tax return.
Question 3: Where should I invest my capital gains in order to get a tax break?
Answer: You can obtain a tax exemption on the sale of a property by purchasing a second property within 3 years of the sale. You can buy a new property anywhere in India.
Question 4: Who bears the tax when the property is sold?
Answer: Certain taxes are carried by the seller, and some taxes are on the buyer.
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