Sale of Properties is one of the most common ways if one needs fund. But it becomes awful when one have to pay considerable amount as tax on sale of its property. But if I say there are some exemptions given by Income Tax Act, 1961, wherein one can save moderate amount of tax.
For detailed discussion let’s begin with; what is long term capital asset?????
There are two types of gains if one sells any capital asset, now you may think what the meaning of capital asset, as per Income Tax Act, Section 2(14) deals with the definition of capital asset; wherein property of any kind held by an assessee, whether or not connected with business or profession of the assesse, is termed as capital asset.
Capital Gain only occurs when capital assets are involved.
There are two types of Capital Gains:
1. Long Term Capital Gain (LTCG): When any properties are sold at least after 24 months from the date of its acquisition, the profit arises from the sale of said property shall be treated as long-term capital gain (LTCG).
2. Short Term Capital Gain (STCG): When any properties are sold within 24 months from the date of its acquisition, the profit arises from the sale of said property shall be treated as Short-term capital gain (STCG).
Lets us discuss the above with a simple example:
If Mr. A in the month of April, 2021, purchased a piece of land and sold the same in December, 2022. In this case land is a capital asset for Mr. A, as he purchased the land in April, 2021 and sold it in December, 2022, i.e., after holding it for a period of less than 24 months. Hence, land will be treated as short-term capital asset, and if sole at a profit then the profit arising from the sale shall be treated as STCG.
Let us take the same example as above
If Mr. Z in the month of April 2002 purchased a Flat and sold the same in December 2021 In this case Flat is a capital asset for Mr. Z, as he purchased the Flat in April, 2002 and sold it in December, 2021, i.e., after holding it for a period of more than 24 months. Hence, Flat will be treated as long term capital asset, and if sole at a profit then the profit arising from the sale shall be treated as LTCG.
As we have understood the meaning of capital asset/ LTCG and STCG, let us discuss the tax implication on sale of capital asset;
If Mr. Ram have a residential house property where he stays in India, which was purchased in August 2009 for Rs. 300,000 (Rupees Three Lakh Only). In the year 2015 Mr. Ram purchased another residential house property for Rs. 5,00,000 (Rs. Five Lakh Only), Mr. Ram shifted to this new property alone. In the year 2022 Mr. Ram sold the property purchased in the year 1999 for Rs. 15,00,000 (Rupees Fifteen lakh Only).
As per simple understanding: Purchase year is- 2009
Sales year is 2022, hence it is more than 24months, henceforth it is Long term capital asset and on sale at profit the profit shall be treated as long term capital profit.
When the Purchase value is Rs. 3,00,000, Sale value is Rs. 15,00,000
The LTCG will be Rs. 12,00,000 (Rupees Twelve lakhs Only)
But this calculation is not correct, now comes the understanding of indexation:
Indexation is a technique that takes into account inflation from the time the asset was bought to the time it was sold. The way it works is that it allows you to inflate the cost of acquisition of the asset to account for the impact of inflation. Through this process, investors will be able to lower their tax liabilities.
Indexation can be obtained from the government’s Cost Inflation Index (CII). The Central Government determines the values in the index and is updated on the income tax department’s website.
NOTIFIED COST INFLATION INDEX UNDER SECTION 48, EXPLANATION (V)
As per Notification no. 62/2022, dated 14-06-2022 following table should be used for the Cost Inflation Index :-
| Sl. No. | Financial Year | Cost Inflation Index |
| (1) | (2) | (3) |
| 1 | 2001-02 | 100 |
| 2 | 2002-03 | 105 |
| 3 | 2003-04 | 109 |
| 4 | 2004-05 | 113 |
| 5 | 2005-06 | 117 |
| 6 | 2006-07 | 122 |
| 7 | 2007-08 | 129 |
| 8 | 2008-09 | 137 |
| 9 | 2009-10 | 148 |
| 10 | 2010-11 | 167 |
| 11 | 2011-12 | 184 |
| 12 | 2012-13 | 200 |
| 13 | 2013-14 | 220 |
| 14 | 2014-15 | 240 |
| 15 | 2015-16 | 254 |
| 16 | 2016-17 | 264 |
| 17 | 2017-18 | 272 |
| 18 | 2018-19 | 280 |
| 19 | 2019-20 | 289 |
| 20 | 2020-21 | 301 |
| 21 | 2021-22 | 317 |
| 22 | 2022-23 | 331 |
lets continue with the above example
| PARTICULARS | Amount (RS.) |
| Full value of consideration (i.e., Sales value of flats) | 15,00,000 |
| Less: Indexed cost of acquisition | |
| (indexation for the year of sale/indexation for the year of purchase* purchase price) | |
| (331/148*3,00,000) | (670946) |
| LTCG | Rs. 8,29,054 |
Previously without indexation the LTCG was Rs. 12,00,000 (Rupees Twelve lakhs Only), but now after indexation Mr. Ram will have to pay tax on Rs. 8,29,054 (Rupees Eight Lakh Twenty Nine Thousand Fifty Four Only).
On Rs. 8,29,054 (Rupees Eight Lakh Twenty Nine Thousand Fifty Four Only), income tax @20% excluding cess shall be levied which comes to Rs. 1,65,810 /- approx.
But Income Tax Act, 1961 as per Section 54, has given exemptions wherein Mr. Ram can save paying the tax amount.
Conditions for calming exemptions as per section 54:
1. Applicable to individual and HUF
2. The capital gain shall be long term
3. Sale of residential house property shall only be allowed
4. From the sale proceeds (profit) taxpayer has to purchase residential house property.
5. The residential house property should be purchase within 2yeras from the date of sale, or in case of construction within 3years.
6. Till those years i.e. from the date of sale of house property till purchase of house property (2years/3years as the case maybe) the sale proceeds shall be kept in a separate bank account named CDAS (capital gain deposit account scheme).
7. The exemption will be the amount invested in the new asset or capital gain arisen whichever is lower.
8. But if the new asset purchase is sold within 3 years of its acquisition, the above exemption shall be revoked and whole amount will be taxable at the year the offence is committed.
lets continue with the above example
| PARTICULARS | Amount (RS.) |
| Full value of consideration (i.e., Sales value of flats) | 15,00,000 |
| Less: Indexed cost of acquisition | |
| (indexation for the year of sale/indexation for the year of purchase* purchase price) | |
| (331/148*3,00,000) | (6,70,946) |
| LTCG | Rs. 8,29,054 |
| Less: Exemption u/s 54 * | Rs. 8,29,054 |
To be deposited in CDAS account and utilized within 2/3years as the case maybe
As per the above calculation if exemptions are availed then no tax needs to be paid, but conditions of claiming these exemptions must be followed, there are other exemptions as per sec 54(B), sec 54(D), sec 54(EC), sec 54(F), sec 54(G) and sec 54(GA) dealing with different conditions for claiming exemptions, which will be discussed in my other upcoming articles.
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Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a piece of professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.
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