Capital Gains Tax: An overview

Any property, whether a piece of land or a house, is regarded as a capital asset. Gains from selling of such assets attract ‘Capital Gains Tax’. Capital gain is thus the net profit that an investor makes after selling off his capital assets at a price that exceeds the original purchase price. Since this profit received falls under the ‘income’ category, a tax needs to be paid, which is referred to as the capital gains tax.

Relevance to the real estate sector

In India, under the Income Tax Act, capital gains tax is exempted in case the individual inherits the property and there is no sale. However, if the person who inherits the property sells it, tax will have to be paid on the income that has been generated from the sale.

It must be noted that this taxation can be either short-term (STCG) or long-term (LTCG). If you sell a house within 24 months, you are levied a STGC tax. STGC is taxed as per the income tax slab rates applicable for the seller. After 24 months, you are charged a LTGC tax, usually charged at 20% for the realty sector, with indexation benefits. If the property is inherited or is a gift, the amount of time the previous owner held the property is considered while making the calculations too.

Tax exemptions on Capital Gains (Section 54F, applicable in the case of long-term Capital Asset)
  • With effect from Assessment Year 2020-21, a capital gains tax exemption is available for purchase of two residential houses in India. However, this exemption is subject to the capital gains not exceeding INR 2 crore. Moreover, the property purchase should be done either a year prior to selling the property or within two years of the sale, and the limit is three years for properties under construction. Also, this exemption is available only once in the lifetime of a seller and the newly acquired property cannot be sold again within three years of purchase or construction.
  • One is also liable for exemption in the case of selling assets like agricultural land within a 10 km radius in a city provided the above-mentioned conditions are applicable.
  • Capital Gains Bonds issued by NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) are eligible for exemption from capital gains tax up to a limit of Rs 50 lakhs.
Tips to avoid tax implications
  • It is always advisable to hold a property for a minimum of three years, after which the profit is automatically treated as long-term capital gains and taxed at 20% after indexation (taking into account the inflation during the holding period and adjusting purchase price), thereby slashing the tax burden.
  • Reinvesting the long term capital gains in residential property provides the assesse with an exemption under Section 54 and 54F of the Income Tax Act.
  • Also, if the seller is unable to reinvest the gains in the purchase of another house or Capital Gains bonds before filing the tax return, he can deposit the balance in the Capital Gains Account Scheme (CGAS) as he becomes eligible for the deduction. The amount has to be deposited under a CGAS before the due date of filing income tax return for the year in which the sale took place.

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