A capital gain is any profit which arises when a capital asset has been sold, like property. This gain however, falls under the income category and will be taxable. The tax would have to be paid for the year in which the asset is sold and is known as capital gains tax, which could be long term or short term. The capital gain is not applicable to inherited property because there is no sale in that case and it is only termed so in case of transfer of property.
The Income Tax Act has also specifically exempted assets which have been inherited but the tax would be applicable if the receiver decides to sell it. In such cases, the cost of acquisition, which is the value of the capital asset received by the seller is subject to tax. However, if the property is acquired after 2001 then the process of calculating property tax is the same as calculating any other LTGC from other property sources. If the property was acquired before 1st of April, 2001, then the cost at which the property was brought is deemed as cost of acquisition. In case of land, if the cost is not available and the property was acquired before April 1, 2001, then the fair market value of the land as on April 1, 2001 will be the cost of acquisition and a registered valuer should be enrolled for a proper estimate.
Calculation of long-term capital gains
While calculating long term capital gains, one could follow a simple step:
One should start with the full value of consideration and then deduct the expenses incurred during and pertaining only to the transfer, indexed cost of acquisition and index cost of improvement.
From the number arrived at, one should deduct exemptions provided under sections 54, 54EC, 54F and 54B. According to Budget 2018, the long term capital gains on the sale of equity shares or units of equity oriented fund that are realized after 31st march 2018 will remain exempt up to Rs 1 lakh per annum and tax at 10% will be levied on LTGC on shares and units of equity oriented fund that exceeds Rs 1 lakh in one financial year without any indexation benefit. When the house is put on sale, certain expenses are deducted from the final sale price like brokerage or commission paid for securing a purchaser, stamp paper cost, traveling expenses that are in connection with the transfer and these can be incurred after the transfer has taken place, and in case of inherited property, the costs of obtaining succession certificate, costs of executor and other related expenses.
The tax rate on long term capital gain currently stands at 20% plus any applicable surcharge or cess.
Ways to save on long-term capital gains on property
In the interim budget of 2019, it was announced that under section 54, the money acquired from the sale of house be reinvested in two residential properties for tax savings. The sale value that is invested should not be over Rs 2 crore and this benefit can be availed only once in one’s lifetime. The existing rule under Section 54 has provision for investing in one property only and one could also invest in bonds specified under Section 54C.
There is often a question in the mind of the tax payer that can the sale consideration be lower than the property valuation and the tax authorities might object if it so. But there is a provision in the Finance Bill 2018 that if the difference between the sale consideration and stamp duty value is less than 5%, then there will be no objection raised to such sales consideration.
What the seller should be aware of
Next, the seller also needs to be aware of the TDS that are levied on acquisition of land or building. In this case, however, it is the buyer who has to pay the TDS at one percent of the value of the property, in case a house is being acquired that is priced above Rs 50 lakhs, before he makes the payment to the seller. The seller, on the other hand, also has to ensure that the buyer has deposited the amount with the tax authorities so that he too can claim the benefits. The seller, if in turn buys a new residential house that costs more than Rs 50 lakhs for the purpose of tax exemptions, should also deduct 1% TDS and deposit the same with the government treasury.
The amount that is left after these taxes have been paid, is what is left for the property owner. It is important to enroll the assistance of a valuer and a tax lawyer to help you with the intricacies of the proceedings.
