When an individual selles land, they are faced with a big question. Did they have a profit or a loss on the sale and how the tax for the same needs to be paid.
The tax applicable on the gains from the sale of a capital asset is known as the capital gains tax. This tax is incurred on the sale of any capital asset whether tangible, intangible, movable, or immovable.
Thus if you’ve sold your property for more than what you bought it for, you will be liable to pay a tax on the profit you made off of it. However, there are a few factors that affect the amount of tax you will be required to pay.
Short Term And Long Term Capital Gains And Tax Rates On Property
As discussed above, any gains on your property beijing sold will be capital gains. However, there are two categories under the capital gains umbrella. These categories are short-term capital gains and long-term capital gains.
In India, if you sell a capital asset within 24 months of owning it, it is considered a short term capital asset. Thus, any gains on such an asset is considered short term capital gain.
Any asset held for longer than 24 months is known as a long term capital asset and thus the gain on it is called a long term capital gain.
How To Calculate Short Term Capital Gains Tax
Short term Capital gains tax does not need to be calculated separately from your income. It is taxed as normal income using the applicable income tax slabs.
However you will be required to calculate the capital gains on the sale of your property using the following formulae:
Final Sale Price - Closing Expenses - Purchase Price Of Property - Cost Of Renovations Done = Short Term Capital Gains
How To Calculate Long Term Capital Gains Tax
Since Long term capital gains tax needs to be calculated unlike short term capital gains tax, let’s look at how to get the long term capital gains first.
Using the following formulae you can calculate the long term capital gains you’ve incurred:
Final Sale Price - Closing Expenses - Indexed Purchase Price Of Property - Indexed Cost Of Renovations Done - Exemptions Under Section 54 = Net Long Term Capital Gains
To find the indexed costs, all you need to do is refer to the table below and apply it to the formulae under it.
Indexed Cost = (Cost / Index Value On Purchase date) x Index Value On Sale Date
Long term capital gains can be calculated by using the applicable tax which is @20%.
Steps To Take To Get Tax Redemption On Capital Gains
There are three main ways that one can save on the capital gains tax that they are liable for after the sale of their property.
1. Claim Exemption Under Section 54EC Of Income Tax Act
The National Highways Authority of India (NHA) and the Rural Electrification Corporation both issue bonds. These are called notified bonds. If an individual who wishes to claim exemption on Capital Gains tax invests in these notified bonds within 6 months of the sale of the asset, they are eligible to receive an exemption under Section 54EC of the Income Tax Act.
The maximum amount that you can invest in these bonds is INR 50 Lakh. If you do not reinvest this money or take out a loan against thee bonds in the next 5 years, the income will become taxable.
2. Buy Another Property
You can also claim tax deduction on capital gains if your buy another property within either two years after or one year prior to the sale of your property.
In case you plan to construct your own house on a plot of land and claim that in the tax deduction, the construction must be completed up till a maximum of three years from the sale date. Also, the cost of the plot is included in the construction cost of the property for tax exemption purposes.
3. Use The Capital Gains Account Scheme
Let’s say you didn’t find a suitable property or even like the idea of investing in notified bonds. In such a case, you can avail a facility called the Capital Gains Account Scheme available at various public banks.
All you are required to do to receive the tax exemption is use the capital gains deposited in the scheme within three years to buy a residential property. In case of failure to do so, your capital gains will then become taxable.