There are a variety of assets in which an individual can invest in India to gain good profits. These may include stocks, mutual funds, bonds, derivatives, commodities, etc. While all these investment instruments are extremely popular, real estate investment accounts for the maximum share of a typical Indian household. As per a report by the Finance Household Committee, Reserve Bank of India, an average Indian household invests 77% of its total wealth in real estate.
However, one thing that every real estate investor should remember is that capital gains or profits generated from selling real estate properties in India are not entirely tax-free. As per the income tax laws of India, capital gain on the sale of property attracts an income tax at a specified rate. This rate is decided as per the nature of the property and the duration for which the investor held it before it was sold.
What are capital gains and capital gains tax in India?
Any profits or gains generated by an investor from the sale of assets like gold, shares, mutual funds, or real estate are known as capital gains. In India, capital gains tax is applicable to both short-term and long-term capital gains. The income tax levied by the government on these profits is known as capital gains tax. Depending on the holding period of these assets, capital gains tax in India is classified into two categories – Long Term Capital Gains Tax (LTCG) and Short-Term Capital Gains Tax (STCG).
What is a long-term capital gain tax on property?
As per the Income Tax Act of 1961, if a real estate property is held for more than two years or 24 months by an investor, the profits or returns generated from it are termed long-term capital gains or LTCG. The income tax applicable on the sale of such properties is known as the long-term capital gains tax.
Currently, the applicable rate for long-term capital gain tax on property in India is set at -20% by the government. It means that if an investor sells their property after holding it for more than two years, they will have to pay a tax of 20% on the profits generated from the sale. The investors can avail of the indexation benefits on the tax paid by them.
Below are a few points that one should remember while calculating the LTCG tax on property:
- The taxpayer can subtract the commission or brokerage paid to an agent while calculating the taxable amount for long-term capital gain tax on property.
- The taxpayer can also deduct any additional expense incurred by them for home improvement or construction while they were holding the property.
- The taxpayer can claim certain tax exemptions under sections 54, 54B, and 54EC while evaluating the LTCG amount.
What is a short-term capital gain tax on property?
If a real estate property was held for less than 24 months by an investor before it was sold, the return or profit generated from its sale is known as short-term capital gains or STCG. The income tax levied on short-term capital gain is known as short-term capital gain tax.
As per the existing income tax laws, short-term capital gain generated by an investor is added to their annual taxable income and will be taxable as per the relevant income tax slab rate. For example, if a person makes a short-term capital gain of ₹5 lakhs and falls in the 30% tax bracket, they will have to pay an STCG tax of 30% on ₹5 lakhs, i.e., ₹1.5 lakhs.
Like LTCG tax, an individual can subtract the brokerage amount and home improvement costs while calculating the taxable income for short-term capital gain tax on property.
Proposed changes for 2023
The Government of India has proposed a few changes in the existing structure for the capital gain tax in India. Currently, different asset classes attract tax at different rates, and their classification of LTCG and STCG is also defined differently. However, the government is planning to bring anonymity to the capital gain tax structure of India by announcing the changes during the 2023 Union Budget.
It means that all types of assets that can generate capital gains, including equity shares, mutual funds, and immovable properties, can attract the LTCG and STCG tax at the same rate after 2023.
To sum it up
The calculation of the capital gain tax on the sale of property in India is complex. One can take the help of a property tax consultant or advisor while determining the payable tax amount. These professionals can also help in lowering taxes and maximizing profits.
How much long-term capital gain is tax free?
Sections 54 to 54F limit the amount that can be excluded from long term capital gains tax to Rs. 10 crores. Please be aware that if this new property is sold within three years of the purchase or completion of the building, the exemption may be revoked.
What is the tax on long term capital gains section?
For gains in stocks and equity mutual funds, Long Term Capital Gainis 10%. Gains from real estate, debt funds, and other assets, as well as the advantage of indexation, are 20%.
How Do I Avoid Short-Term Capital Gains Tax?
The simplest strategy to avoid paying short-term capital gains taxes is to keep the asset for longer. Keeping the item for at least a year result in substantially lower tax rates for the taxpayer.
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