Capital Gains Tax: If you are planning to sell a property, you may be liable to pay tax on it. However, sellers often remain unaware of the amount of tax involved or how to potentially save on it. If you have recently sold a property or land, this information could prove very useful to you. It is worth noting that any profit earned from selling an asset is termed a “capital gain” and is subject to tax by the government. The government has established specific rules regarding the taxation of profits from property sales, and you are required to pay tax in accordance with these regulations.
Capital gains are of two types: long-term capital gains (LTCG) and short-term capital gains (STCG). If you hold the asset for more than 24 months after purchase, you are liable for long-term capital gains tax. If you sell it within 24 months, you must pay short-term capital gains tax. This tax applies only to the profit earned.
What do the government rules say?
Regarding government regulations, the Finance Bill 2024 introduced an amendment that eliminated the indexation benefit on the sale of immovable property. The amendment clarifies that while indexation benefits were previously available for properties purchased before 2024, taxpayers (including Hindu Undivided Families) now face two options: pay capital gains tax at a rate of 12.5% without indexation, or pay at a rate of 20% while availing the indexation benefit.
How is LTCG calculated?
Suppose you sell a property for ₹10 lakh that was originally purchased in 2003. There are two ways to calculate the LTCG. In this case, the inflation-adjusted purchase cost would be ₹7.26 lakh, calculated by multiplying the original purchase price of ₹2 lakh by the factor of 363/100. The resulting profit would be ₹2.74 lakh. At a tax rate of 20%, the tax liability would amount to ₹54,800.
If calculated without indexation, the purchase cost remains ₹2 lakh; consequently, the profit would be ₹8 lakh, and the tax—at a rate of 12%—would amount to ₹1 lakh.
With indexation, the tax amount is lower, though the applicable rate is 20%. Conversely, without indexation, the tax amount is higher, but the rate is 12.5%. However, if the profit earned is lower, tax must still be paid even without indexation. For instance, if you purchased a property for ₹2 lakh and sold it for ₹4 lakh, the purchase cost is ₹2 lakh. Regarding the profit, subtracting the purchase price of ₹2 lakh from the selling price of ₹4 lakh results in a gain of ₹2 lakh. Subsequently, the tax payable at a rate of 12.5% would amount to ₹2,500.