Long-Term Capital Gain Tax on Property Explained

Last Updated on December 19, 2023 by BFSLTeam BFSLTeam

Long-term capital gains (LTCG) refer to the profits realised from a capital asset’s sale. These gains are subject to taxation, and the applicable tax rate depends on the type of asset sold. However, the rate of taxation on long-term capital gains from the property is significantly lower than the rate on short-term capital gains. Capital gain tax on sale of property in India is 20% with indexation.

Capital gains are basically the capital gain on sale of property. It means the profits you make when selling an investment or property. Depending on how long you hold onto that asset, these gains can be classified as short or long-term. This distinction is important because it determines the tax liability you owe on the sale. For example, if you sell a house, you may be liable to pay either short-term or long-term capital gains taxes, depending on the time you held onto the property.

When is a Capital Gain from Property deemed to be Long Term?

If you’re looking to figure out when your property capital gain is considered long-term, the Income Tax Act 1961 has an answer for you. Any immovable property held for more than 24 months is classified as a long-term capital asset subject to the long-term capital gains (LTCG) tax. However, determining the exact date of acquisition of immovable property has been challenging since there’s no definite mechanism in the Act to do so. Even after several court decisions, this issue is still in the air.

Calculation of Long-Term Capital Gains from Property

Now that you know when a capital gain is considered long-term, how do you calculate it? To calculate the long-term capital gains, you’ll need to subtract the indexed acquisition cost from the property’s sale price, and the resulting figure will be the LTCG. The indexed acquisition cost is calculated by multiplying the acquisition cost with the cost inflation index (CII) for the year you sold the property.

Tax Implications on LTCG on Property

Long-term capital gains from the sale of a property are subject to taxation as per the provisions of the Income Tax Act 1961. Therefore, if you sell a property, you may have to pay taxes on your long-term capital gains. As of 1st April 2017, the tax rate on long-term capital gains from the property is 20%, including cess and surcharge. However, if you inherit a property, you won’t have to pay taxes until you decide to sell it. Then, you’ll be subject to the same rules as other properties.

When calculating your LTCG on sale of property, you can consider any commission or brokerage fees you paid when you acquired the asset. You can also deduct any expenses incurred on home improvement or construction during the duration you owned the asset. Additionally, you may be eligible for tax exemptions under Sections 54, 54B, and 54EC.

Tax Exemptions on Long-Term Capital Gains on Property

By paying a 20% Long Term Capital Gains (LTCG) tax on selling property, assesses can have a substantial tax burden. Fortunately, the Income Tax Act provides various exemptions to help reduce this burden. For example, if assesses reinvest the money gained from selling a property in the purchase of another asset, they can take advantage of these exemptions.

• Tax Exemptions Available under Section 54Are you looking to take advantage of the tax exemptions available under Section 54? You can avail of tax benefits on capital gains from the sale of your house property if you invest that money in purchasing up to two house properties. However, it is important to note that this exemption can only be availed once in your lifetime, provided the capital gains don’t exceed ₹2 Crore. Also, you must invest the capital gain amount and not the sale proceeds collected from the sale of your assets. If the cost of the new properties is more than the capital gains, the property gain tax exemption will be limited to the number of capital gains only.
• Tax Exemptions Available under Section 54ECIf you’ve recently sold a property and want to save on the tax you pay on capital gains, you can take advantage of the tax exemption available under Section 54EC. You can reinvest the profit made from the sale of your property in bonds issued by institutions such as REC and NHAI, up to a maximum of ₹50 lakh. However, you must invest within six months of the sale and before the due date for filing your tax return. Moreover, you cannot sell the newly purchased asset for 3 years from the date of sale. However, the period has been extended to 5 years from the financial year 2018-19. So, make sure to invest in the bonds before the deadline of your tax filing to avail the benefits of this exemption.
• Tax Exemptions Available under Section 54BIf you have gained long-term capital from agricultural land, you can avail of tax exemptions under Section 54B. You can invest your gains into a new agricultural land within two years of the date of transfer. However, you must not sell this newly purchased land within three years of purchase.

Suppose you cannot invest your capital gains into a new agricultural land before the deadline for income tax return filing. In that case, you can deposit your gains in a deposit account under any branch of a public sector bank under the Capital Gains Account Scheme, 1988. These exemptions are a great way to reduce your tax liability and should be considered before computing total taxes on your long-term capital gains from property.