Summary : Capital gain is considered as the gain/profit on sale of property which is arrived at by deducting the Purchase Price from its Sale Price and the tax is to be paid on that gain which is termed as Capital Gain tax. There are two types of gains that arise on Sale/transfer of property and those are Short term Capital Gain (STCG) and Long term Capital Gain (LTCG).
Introduction : Below mentioned table shows the criteria to be fulfilled for an asset to be termed as Short term or Long term :
| Capital Asset | STCG, if held for | LTCG, if held for |
| In case transfer takes place before 23.07.2024 | ||
| · Security (other than unit) listed in a recognised stock exchange
· Unit of equity oriented fund/unit of UTI · Zero Coupon Bond |
≤ 12 months immediately preceding the date of its transfer | >12 months immediately preceding the date of its transfer
|
| · Unlisted shares
· Land or Building or both |
≤ 24 months immediately preceding the date of its transfer | >24 months immediately preceding the date of its transfer
|
| · Listed units of business trust
· Unlisted securities other than shares · Other Capital Assets |
≤ 36 months immediately preceding the date of its transfer | >36 months immediately preceding the date of its transfer
|
| In case transfer takes place after 23.07.2024 | ||
| · Security listed in a recognised stock exchange including listed units of a business trust
· Unit of equity oriented fund/unit of UTI Zero Coupon Bond |
≤ 12 months immediately preceding the date of its transfer | >12 months immediately preceding the date of its transfer
|
| · Other Capital Assets | ≤ 24 months immediately preceding the date of its transfer | >24 months immediately preceding the date of its transfer
|
Note : As per section 50AA, capital gains arising from transfer of the following assets would always be capital gains arising from transfer of short-term capital assets irrespective of the period of holding of such assets –
- Units of a specified mutual fund acquired on or after 01.04.2023
- Market linked debentures
- Unlisted bond and unlisted debenture which is transferred or redeemed or matures on or after 23.07.2024.
Strategies to save Capital Gains Tax on Sale of Property :
1. Deducting Selling Expenses : Deducting the expenses incurred on selling the property reduces the sale price and hence eventually reducing the gain which in turn reduces the tax burden.
Example : Mr. Ram sold his property for ₹40 lakhs. However, he incurred selling expenses such as brokerage, legal charges and advertising expenses amounting to ₹5 lakhs. As a result of the selling expenses, the sale price now comes down to ₹35 lakhs.
2. Jointly Owned Property : If a property is jointly owned, the capital gain arised on the sale of property gets divided into the co-owners on the basis of their share in the property leading to taking double benefit of basic exemption limit and the overall liability reduces.
Example : Mr. and Mrs. Ram jointly owns a property which they purchased five years ago for ₹60 lakhs. They sold the same for ₹90 lakhs leading to gain of ₹30 lakhs, which is equally divided between the two as ₹15 lakhs each. They can claim exemption upto ₹1.25 lakhs each, totalling to ₹2.5 lakhs on their respective gains and hence reducing the overall tax burden.
3. Holding Period of Property : Holding a property for more than 24 months, qualify the gain as long-term and the rates for long term is generally lower than short-term.
Example : Mr. Ram held the property for less than 24 months leading to short term capital gains which is than charged at the normal slab rate and without any exemption, whereas if Mr. Ram held the property for more than 24 months which than leads to long term gain to be taxed at 12.5% after basic exemption of ₹1.25 lakhs on the long term gain.
4. Benefit of Indexation : When an asset is held for more than 24 months, it leads to long term capital asset and on sale/transfer of that asset long term capital gain arises which than gets the benefit of indexation leading to enhanced cost and reduced gain, eventually tax burden reduces.
Example : Suppose Mr. Ram purchased property in year 2020 and sold the same in year 2024, then the cost of asset which is to be reduced from sale price to calculate gain is calculated as the (CII for the year of sale i.e. 2024 / CII for the year of acquisition i.e. 2020) x Cost of asset.
5. Reinvesting in New Residential Property (Section 54F) : Where property sold/transferred is residential property, than for saving the tax on the gain arrived on the same can be saved by investing in other residential property as :
- Purchase new residential property either one year before or two years after the date of sale/transfer, or
- Construct a residential property within three years from the date of sale/transfer.
Important point to note here is that the entire sale proceeds needs to be reinvested to avail full exemption. If only capital gain is reinvested than the exemption is granted proportionally and also the seller should not have more than one residential property, excluding the newly acquired property.
6. Reinvesting in New Property (Section 54) : Where property is sold/transferred than for saving the tax on the gain arrived on the same can be saved by investing in other property as :
- Purchase new property either one year before or two years after the date of sale/transfer, or
- Construct a property within three years from the date of sale/transfer.
Important point to note here is that the entire sale proceeds needs to be reinvested to avail full exemption. If only capital gain is reinvested than the exemption is granted proportionally.
7. Tax Loss Adjustment : Losses from other mutual funds or shares can be used to offset capital gains on property, to minimise the tax liability.
8. Investing in Capital Gain Account Scheme (CGAS) : For claiming exemption on the gain arrived, investing in CAGS can be considered, keeping in mind the time limit of three years for utilising the same, otherwise liability to pay tax arises.
9. Reinvesting gains into shares of Manufacturing Company (Section 54G) : Under this section, individuals can reinvest the gains from sale of residential property into shares of an eligible manufacturing company.
10. Investing in Bonds (Section 54EC) : Under this section, gain of sale/transfer of property can be saved by reinvesting in specified bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC), considering the time limit of making investment within sux months from the date of sale/transfer.
Conclusion : Above mentioned methods can reduce the tax liability arised on an individual on the sale/transfer of the capital asset.
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