[ecis2016.org] How is long-term capital gains tax calculated and what are the exemptions that property sellers can avail of? Here is a simple guide to the same
Many home buyers are often confused when it comes to understanding the applicability of long-term capital gains (LTCG) tax, when they sell a property. Let us check out five important things related to LTCG tax that can be of great help.
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1. How is long-term capital gains (LTCG) tax calculated?
Mitesh Jain, partner, Economic Laws Practice, explains: “As far as immovable property (i.e., land and buildings) is concerned, the Income-Tax Act has prescribed a holding period of 24 months, to classify it as a long-term capital asset, which shall be applicable on properties sold on or after April 1, 2017. The tax on LTCG is payable at 20 per cent, plus applicable surcharge and cess, on the resulting net figure.”
Computation of long-term capital gains (LTCG) tax
| Particulars | Description | |
| Sales consideration | Sale proceeds/full value of the consideration received or accruing, as a result of the transfer of the capital asset.
In case of an immovable property, the sale consideration or stamp duty value, whichever is higher is adopted. |
|
| Less: | Expenditure incurred wholly and exclusively for the transfer | Expenditures, such as a commission or brokerage paid, stamp duty and registration fees, lawyer’s fee, etc. |
| Less: | Indexed cost of acquisition | Cost of acquisition (COA) is the amount incurred at the time of acquisition of the capital asset. (Refer to the note below, for computation of indexed COA.) |
| Less: | Indexed cost of improvement | Cost of improvement (COI) is the cost incurred on the property, subsequent to its acquisition, i.e., any major modifications undertaken or any substantial addition to the property. (Refer to the note below, for computation of indexed COI.) |
| LTCG (gross) | ||
| Less: | Eligible exemptions | Exemptions are available under Section 54, 54EC, 54F, etc., subject to fulfilment of prescribed conditions. |
| LTCG (net) |
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(Table provided by: Economic Laws Practice)
It is important to note that the benefit of indexation, is available only in case of a long-term capital asset. Indexation is a process of adjusting the cost of acquisition and cost of improvement of a long-term capital asset, against the inflationary rise in the value of the asset. For this purpose, the I-T Act has notified a yearly Cost Inflation Index (CII).
The indexed cost of acquisition/ improvement is calculated as under:
Indexed COA (or COI) = COA (or COI) * CII for the year of sale / CII for the year of purchase
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2. Long-term capital gains (LTCG) tax on the sale of ancestral property
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Ancestral properties are those that are inherited by a person from parents/relatives, either through a will or by way of a gift. While the receipt of such ancestral property from family members/relatives is tax-exempt for both, the family member and the receiver of the property, there are certain tax implications on the sale of such ancestral property.
“You are not liable to pay tax on inheritance. Long-term capital gains (LTCG) tax comes into play, only if you decide to sell the inherited property. If the property is acquired after 2001, then, the procedure to calculate LTCG is the same as for any other property. In case the property was acquired before April 1, 2001, then, the cost at which the property was bought, is considered as the cost of acquisition. As the cost of the land is not available and the property was acquired before April 1, 2001, the fair market value of the land as on April 1, 2001, can be considered as the cost of acquisition. To ascertain this, you would need to engage the services of a registered valuer. The long-term capital gains (LTCG) tax can be calculated using this fair market value and the CII for 2001,” suggests Navin Chandani, chief business development officer, BankBazaar.com.
3. Ways to save long-term capital gains (LTCG) tax on property
In the interim budget 2019 announcements, under Section 54, it has been proposed to allow long-term capital gains (LTCG) from the sale of a house to be invested in two residential properties, to save the tax. The sale value invested, should not exceed Rs two crores and this benefit can be exercised only once in a lifetime. The existing rule under Section 54, allows investment in up to one property only. Apart from this, you can also invest in bonds specified under Section 54EC.
4. Can the sale consideration be lower than the valuation of the property?
“The tax authorities may object, if the sale proceed is lower than the valuation of the property by the state authority. The Finance Bill of 2018, has proposed that if the difference between the sale consideration and the stamp duty value does not exceed five per cent, then, the tax authorities shall not object to such sales consideration adopted by the assesse,” adds Jain.
5. TDS provisions on sale of a house
The seller also needs to be mindful of the tax deduction at source (TDS) provisions, governing the acquisition of land or building. The onus is on the buyer, to deduct TDS at one per cent of the value of the property, when he buys a house worth more than Rs 50 lakhs, before making the payment to the seller. However, the seller needs to ensure that the buyer deposits the amount with the tax authorities, so that the seller can claim credit for the same. Also, the seller, at the time of purchasing a new residential house that is worth more than Rs 50 lakhs, for the purpose of claiming exemption, should deduct TDS at one per cent and deposit the same with the government treasury.
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