Pay tax on selling property!

Buying and selling property is a big activity in India. Thousands of properties are sold everyday all over the country. While the process of buying-selling property may seem to be simple, it is not. There are several legal and tax matters involved in a real estate deal.

Here are some of the taxes that may have to be paid while selling a property.

If you have sold a property and made a profit, then it is considered income.

If you have income, you’ll have to pay taxes. When selling a property, how is the calculation of taxes done? How can taxes be saved? Let’s find out.

When selling capital assets like houses or land, if there is a profit, known as capital gain, then taxes are levied on that profit.

There are two ways in which tax is applied to capital gains:

If a property is held for 2 years or more before being sold, it is considered as a long-term capital gain (LTCG). A tax of 20% is applied to the capital gain with indexation benefit.

On the other hand, if a property is sold before 24 months, the profit obtained is termed as short-term capital gain (STCG). In the case of short-term gains, the profit will be added to your regular income, and the tax will be calculated based on the income slab.

In calculating capital gains on property, the cost of acquisition, which refers to the total expenses incurred in purchasing the property, holds significant importance.

The cost of acquisition includes not only the purchase price of the property but also factors like stamp duty, registration fees, brokerage, and in the case of under-construction properties, elements like GST. Additionally, expenses made for the repair or renovation of the property can also be considered as part of the cost of acquisition.

To claim these expenses, you should have documents such as the transfer deed, bills, and other relevant paperwork.

If a home loan has been taken to purchase a house, the interest paid on it can also be included in the acquisition cost.
However, this amount might not have been claimed as a deduction in previous years’ income tax returns.

In the context of long-term capital gain, one will benefit from indexation, which accounts for inflation.  In the calculation of LTCG tax, the indexed value of the property’s acquisition cost needs to be determined based on inflation.

To calculate the indexed cost, you can refer to the Cost Inflation Index (CII), which is available on the Income Tax Department’s website.

How will the indexed cost of the property be calculated?

To calculate the acquisition cost of the property based on inflation, you need to multiply the Cost Inflation Index (CII) of the year in which the property is being sold with the acquisition cost. Then, divide the result by the CII of the year in which the property was purchased.

As per the notification from the Income Tax Department, the Cost Inflation Index (CII) for the financial year 2023-24 (provisional) is 348, while the CII for the year 2015-16 is 254.

Suppose a poperty has been bought in FY 2015-16 for Rs 31 lakh, then the indexed cost would be Rs 42,47,244  (31 lakh * 348/254). Consequently, the long-term capital gain would not be Rs 19 lakh rupees, but Rs 7.52 lakh. On this gain, tax would be levied at 20%. Due to the benefit of indexation, the tax impact would be Rs 1.54 lakh, instead of  lRs 3.80.

Besides all this, you can potentially save the long-term capital gain tax.
For this, you would need to purchase or construct a residential property under Section 54. By selling the old house and using the profit to buy a new house, you won’t have to pay tax on the gains.
Tax exemption on the purchase of residential property applies only to capital gains up to Rs 1 cr.
Beyond this limit, taxes will apply. And if you purchases a new house for more than Rs 50 lakh, you would need to deduct one percent TDS and make the payment to the seller.