Latest Information on the Tax Implications of Selling a Property
Union Budget 2024: Finance Minister Announces Capital Gains Tax Implications for Property Sales
Finance Minister Nirmala Sitharaman announced changes to the capital gains taxation regime on property sales in the Union Budget 2024, which was released on July 23, 2024.
The new rules increase the capital gains tax exemption limit to Rs 1.25 lakh per year. Additionally, the Long Term Capital Gains Tax (LTCG) on the sale of real estate has been reduced to 12.5%. Previously, the LTCG rate on property sales was 20%. The reduction will help to eliminate indexation benefits on long-term capital gains, simplifying capital gains tax calculations for administrators and taxpayers.
The Finance Minister has directed that all listed financial assets held for more than a year be classified as long-term assets. Unlisted financial or non-financial assets that have been held for at least two years are considered long-term.
All About Tax Implications When Selling a Property
There may come a time in your life when you decide to sell your most valuable asset—a home. This decision can be made for a variety of reasons, including moving to a better house, relocating to another city or country, or facing a financial crisis. However, there is one issue that requires your attention: in India, selling property is subject to taxation. The tax is levied on the sale of all types of property except agricultural land. The property seller must pay two types of taxes when receiving income from the sale of immovable property. Similarly, the same rules apply to an NRI property owner. To learn more about such taxes, continue reading the blog.
Types of Taxes to Pay When Selling A Property
The following are the taxes to be paid when selling a property:
Tax Deducted at Source
As the name implies, it is a tax paid when making a payment to the seller. The seller pays TDS, but the buyer deposits it on their behalf.
TDS is levied at 1% of the total sale consideration of the property under Section 194 IA of the Income Tax Act of 1961.
Capital Gains Tax
Immovable property, such as land, buildings, apartments, and individual houses, is classified as a capital asset for income tax purposes. Thus, the proceeds from the sale of a property are treated as capital gains and thus subject to Capital Gains Tax.
Any land used for agriculture is exempt from this tax.
Types of Capital Gains
Capital gains are further divided into two types: short-term capital gains and long-term capital gains.
1. Short Term Capital Gains (STCG)
The STCG Tax applies when a property is sold within 24 months of purchase. In the case of an inherited property, the original owner’s purchase date will be considered.
The difference between the sale and purchase prices of a property is known as the STCG. This STCG amount is added to the seller’s regular income and taxed based on the seller’s income tax slab.
Example of Short-Term Capital Gains:
Consider the case of Mr. Jha, an Ahmedabad schoolteacher who purchased a one-bedroom flat in April 2019 for Rs. 25 lacs and sold it in November 2020 for Rs. 30 lac. Mr Jha’s profit of Rs. 5 lacs will be treated as his STCG and added to his regular salary income. The total income (STCG + salary + any other sources) would be taxed according to his income tax bracket.
2. Long Term Capital Gains (LTCG)
The LTCG Tax applies when a property is sold after 12 months of purchase. The time period was reduced from three to two years in Budget 2017, and from two to one year in Budget 2024.
The LTCG Tax rate is 12.5%. It has been reduced from 20% to 12.5% in the Union Budget for 2024. This is in addition to the regular income tax that the seller must pay on salary or business profits.
According to the updated capital gains tax implication rules announced in the Union Budget 2024, LTCG will be calculated on the difference between the purchase and sale price of the property.
Previously, the LTCG was calculated by factoring in inflation costs when selling the property. The benefit of indexation was available to determine the fair cost of purchasing the property in terms of its current market value. However, this benefit was removed from the Union Budget for Fiscal Year 2024-25.
Example of Long-Term Capital Gains Tax Calculation Without Indexation Benefit
For example, Ms. Gupta, who lives in Navi Mumbai, purchased a two-bedroom row house in May 2004 for Rs. 30 lacs and sold it in July 2024 for Rs. 90 lacs.
Under the new Capital Gains Tax Regime, she must pay tax on the difference between the purchase and sale price (Rs.90 lacs – Rs.30 lacs).
Thus, Ms. Gupta would have to pay LTCG Tax on the Rs. 60 lacs gain (Rs. 90 lacs – Rs. 30 lacs). Here, the LTCG payable is Rs. 7.50 lacs (12.5% of Rs. 60 lacs).
Example of Long-Term Capital Gains Tax Calculation with Indexation Benefit (No Longer Available)
Indexation is used to calculate the inflation-adjusted cost of purchase. The calculation is as follows:
Original purchase price multiplied by (Index Value of Sale Year ÷ Index Value of Purchase Year).
Consider Ms. Agarwal, a banker in Navi Mumbai who purchased a two-bedroom row house in May 2004 for Rs. 20 lakh. She sold the house in November 2019 for Rs. 90 lakhs.
Even though she purchased the house for Rs. 20 lacs, she is not required to pay tax on Rs. 70 lacs (Rs.90 lacs minus Rs.20 lacs). Instead, the inflation-adjusted purchase price for her house is calculated as follows:
Purchase price: Rs. 20 lacs
Sale Price: Rs. 90 lacs
Cost Inflation Index of year of purchase (FY 2004-05): 113
Cost Inflation Index of year of sale (FY 2020-21):301
Indexed Cost of Acquisition = 20 x (301/ 113) = Rs. 53.27 lacs
Thus, Ms. Agarwal would be required to pay LTCG Tax on the Rs. 36.73 lacs gain (Rs. 90 lacs minus Rs. 53.27 lacs). Here, the LTCG payable is Rs. 7.35 lacs (20% of Rs. 36.73 lacs).
It should be noted that stamp duty, registration fees, and any costs incurred in post-purchase property improvements (such as renovation, home improvement, expansion, and so on) can all be included in the total acquisition cost. However, the cost of such improvements should be indexed to the specific year in which they were carried out.
Also, the charges incurred during the property’s sale process can be deducted from the sale price. For example, if Ms. Desai had paid Rs. 1 lac as broking, the total sale price would have been Rs. 89 lacs.
Capital Gains Tax for NRIs
According to the IT Act, non-resident Indians must pay 20% of the total cost of the property as long-term capital gain tax if they own it for more than two years. However, short-term capital gains tax is calculated using the Income Tax Slab Rates for NRIs, which are based on total taxable income. They must pay a 30% short-term capital gains tax if they sell the property within two years of purchase.
Major Factors Affecting Capital Gain Tax on Sale of Property
Below are a few major factors that influence the calculation of capital gain tax on the sale of the property.
Cost of the Property – The cost of property influences the amount of capital gain tax levied on the sale of property. This is because the total taxable amount also includes the property’s renovation costs. For example, suppose you bought a property for Rs 40 lakh and spent Rs 10 lakh on its renovation. The capital gains tax will be levied on Rs. 50 lakh.
Holding Period – Your tax liability is affected by the holding period during which you continue to own the property before selling it. If the transaction falls under the short-term capital gains category, you may face a higher tax liability. However, if it is considered a long-term capital gain, you may have to pay 20% capital gain tax on the sale of the property.
New Property Investments – According to Indian IT Law, if you reinvest the amount you receive in exchange for your property within a certain time frame, you may be able to pay a low capital gains tax.
Property Ownership – The number of properties you own affects your tax liability. If you own multiple properties, you may be subject to a higher capital gain tax when you sell one of them. However, the tax burden is minimal for single-property owners.
Details Needed to Deposit TDS When Selling a Property
The following are some of the most important details to remember when depositing TDS when selling a property.
PAN Card Number of the Seller and the Buyer
Residential Address of the Seller and the Buyer
Residential status of the seller of the property
Full address of the property to be sold
Date of Agreement
Date of Payment
Total transaction value
Total amount paid
Buyers can pay TDS when selling property online or offline. To make a TDS payment online, they must go to the Income Tax Department’s online portal, complete Form 26QB, and follow the instructions. On the other hand, if they want to pay TDS when selling a property offline, they can go to any bank and complete the same form.
Note: Form 26QB can only be completed by Indian residents for TDS payment when selling a property. NRIs must fill out Form 27Q.
Important Information about TDS when Selling a Property
Here are some important TDS considerations when selling a property.
The seller must provide the buyer with their PAN Card and ensure that they obtain and issue Form 16B.
The buyer should check their annual Form 26AS (Annual Tax Statement) to ensure that they have deposited the correct amount of TDS.
The property buyer deducts TDS and pays it to the government on behalf of the seller.
If the property buyer fails to pay the applicable TDS amount on time, the authorities may penalize them.
To file the TDS, the property buyer must fill out Form 26QB.
If there are multiple parties involved, each one must fill out Form 26QB separately.
Concluding
If you decide to sell your property at any time, we recommend that you consider the tax implications. If you are aware of such an implication, you may lose a significant amount of money. It would be beneficial to perform the calculations outlined above before signing a sale deed.
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