Sale of property: Taxes thereon

Author: Anil Rego

Capital gains on property have always dogged the average investor because there are numerous nuances that one should look at whilst computing capital gains on property. Property here includes residential property, land, jewelry etc.

Categorization and tax liability

While capital gains on securities are easier to compute and understand, the nuances of capital gains related to property sale is slightly more complex since the computation mechanism is different; including the treatment for short term capital gains.

Capital gains are taxed on the basis of the holding period of the capital asset from the date of purchase. One can bifurcate this assessment under short term capital gains (STCG) and long term capital gains (LTCG). Short-term assets are those that are held for 3 Yrs or lesser and those held for more than the 3 yr period is categorized qualify for long term capital gains.

Capital Asset	STCG	LTCG
Other Assets & Immovable property	Definition: Held for a period not exceeding 36 months from date of Acquisition	Definition: Held for a period exceeding 36 months from date of Acquisition
	Tax Rate: Included in Gross Total Income. Rate applicable as per tax bracket	Tax Rate: 20% with indexation + surcharge & Cess

Computation and exemption

Short Term Capital Gains: If a capital asset is sold within a period of 36 months of acquisition, the computation is fairly simple. The sale consideration is reduced by the Purchase cost and the net amount is added back into income (u/h Short Term capital gains) and is taxed at normal rates.

Long term capital Gains: Sale consideration is reduced by indexed cost of acquisition and improvement. The net amount termed as long term capital gains, can be re-invested in residential property and exemption availed u/s 54 and 54F depending on the type of asset sold.
Indexation and its impact


Indexation is nothing but adjusting the cost of purchase of units to the cost inflation index as on the date of sale. Indexed cost is calculated with the help of a table of cost inflation index that is provided by a notification in the official gazette each year. Indexation essentially adjusts cost for inflation thereby reducing the amount of capital gains.

Here`s is a simple example of how capital gains with indexation would work -

Mr. Sohan, sold his property for a sum of Rs. 60 Lakh in FY2011, this property being bought in FY2007 for ~Rs. 35.94 Lakh. The CII factor for FY2011 is 711 and for FY2007 is 519 and based on this the indexed cost of acquisition is at Rs. 49.24 Lakh. The workings are as mentioned below -

Exemption u/s 54 and 54F

Long term capital gains can avail exemption u/s 54 and 54F, these sections are applicable for different types of asset transfers and the differences / similarities of the section is as mentioned blow -

In both cases, for availing the exemption, re-investment should be made into a residential property and the same should be done within 3 years from the date of transfer (in case of construction of residential property) or 1 year before transfer / 2 years` of transfer (in case of purchase of residential property). In case one is unable to make the re-investment, the amount of capital gains should be parked in capital gain deposit scheme (prior to tax filing date) in any specified bank and enclose the proof of such deposit with the return of income.

Point of difference	Section 54	Section 54F
Asset transferred	Residential House property	Transfer of a long term capital Asset not being a residential house
Amount of exemption	Amount of investment	Amount of investment * Capital gains ; Net consideration
Additional property prior to availing exemption	Yes. The person can hold any number of house property on the date of transfer.	No. The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F
Sale of re-invested property within 3 years`	The amount of capital gain exempted from tax on the original asset will be reduced from the cost of acquisition of the new asset	The amount of capital gain which is claimed exempted will be taxed as such in the year in which transfer takes place.
Nature of capital gains in case of the above default	Short term Capital gain	Long term Capital gain.

Source: Incometaxindia.gov

Hope this brief note on tax implication of capital gains arising from sale of property helps you deal with the tax woes that you face.