How is capital gains tax calculated on sale of property?

Let me share the method for how to calculate capital gain on sale of property. Calculating capital gains tax on the sale of property in India involves several key steps, which depend on whether the gain is classified as Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG).

How to Calculate Capital Gains on Sale of House?

The classification is based on the holding period of the property. If the property is held for more than two years, the gain is classified as LTCG. If the property is sold within two years of purchase, the gain is classified as STCG.

Capital Gain= Sale Price − (Cost of Acquisition + Cost of Improvement + Expenses related to transfer)

• Sale Price: The amount for which the property is sold.

• Cost of Acquisition: The original purchase price of the property.

• Cost of Improvement: Any expenses incurred to improve the property, which adds value.

• Expenses related to transfer: This includes brokerage fees, legal charges, and any other costs incurred during the sale.

LTCG is taxed at 12.5% without

indexation while STCG is taxed at the individual’s applicable income tax slab rate.

I hope you have an idea about how is capital gains tax calculated on sale of property.

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Worrying how to

calculate capital gain tax on sale of property

? Here is your answer.

The capital gains tax on the sale of property is governed by the Income Tax Act, 1961. The tax treatment varies based on whether the property is a short-term capital asset or a long-term capital asset. Here's a basic overview:

If the property is held for less than 24 months (2 years), it is considered a short-term capital asset. The gain arising from the sale of such property is treated as Short-Term Capital Gains (STCG).

STCG=Selling Price − (Cost of Acquisition + Cost of Improvement +Transfer Expenses)

The short-term capital gains are added to the individual's total income and taxed at the applicable slab rates.

If the property is held for 24 months or more, it is considered a long-term capital asset. The gain arising from the sale of such property is treated as Long-Term Capital Gains (LTCG).

LTCG=Selling Price− (Indexed Cost of Acquisition + Indexed Cost of Improvement +Transfer Expenses)

The "Indexed Cost of Acquisition" and the "Indexed Cost of Improvement" are adjusted for inflation using the Cost Inflation Index (CII) published by the Income Tax Department.

The LTCG on the sale of residential property was taxed at a flat rate of 20% after indexation.

This is how you can

calculate capital gains on sale of property.

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When it comes to sale of a property, there are two types of capital gains and tax applicability on both are different. 1) Short Terms Capital Gains. 2) Long Terms Capital Gains. 

In short term capital gains, the tax applicability is as per the income tax slab, whereas in case of long term capital gains, the tax applicable is at 20% (with indexation benefit) and 10% (without indexation benefit). Let us look at how is capital gain tax calculated on sale of property in both the types of capital gains.

Tax calculation on short term capital gains is based on the income bracket. Let us understand this with an example:

Sohan sells his property for Rs. 3500000 in 2019 which he had purchased in 2018 for Rs. 2500000. He falls in the income tax slab of 20%. He ends up spending 3 lakh in repairs and pays a brokerage commission of 0.5%, so the capital gains he makes will be done on the following calculations:

Sale price of the house - brokerage/ commission - original purchase price - house renovation cost = Short term capital gains

Therefore,

3500000 - 17500 - 2500000 - 300000 = 682500

Short term capital gains will be Rs. 682500

Tax applicability will be as per his income tax slab of 20%, hence the tax payable will be Rs. 136500.

Tax calculation in long term capital gains is based on a formula, i.e., difference between net sales consideration and indexed cost of property. The tax rate is 20% as of now. Let us understand tax calculation on long term capital gains with an example below:

Sohan sells his property for Rs. 3500000 in 2019 which he bought in 2012 for Rs. 2000000. He falls in the income tax bracket of 20%. He spent 2 lakhs in 2015 on house renovation and paid a brokerage commission of 0.5% while selling the house. This is how his tax will be calculated;

Index acquisition cost calculation = Purchase price of the property x CII of the financial year in which property was sold / CII of purchase year of the property

i.e., 

2000000 x 280 / 200 = 2800000

Indexed house renovation cost calculation = cost of renovation x CII of sale year / CII of purchase year 

i.e.,

200000 x 280 / 200 = 280000

The tax payable at the rate of 20% will be Rs. 80500

Note: The Cost Inflation Index is published online. You can check it there.

This is how is capital gains tax calculated on sale of property. I hope this answer helps you!!