Long-Term Capital Gains on Sale of Immovable Property in India

As per the Indian Income-tax Act, income arising from the sale of a capital asset is taxed under the head ‘Income from Capital Gains’. Under section 48, capital gains are calculated by deducting the followings from the full value of the consideration arising from the sale of property:

i) the cost of acquisition,

ii) the cost of improvement, and

iii) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the property.

The following properties come within the meaning of Capital Asset/Property:-

• Immovable Property being land or building or both (except the immovable property held as Stock-in-Trade and Rural Agriculture Land)
• Shares and Securities
• Jewellery (made of Gold, Silver, Platinum, or any other precious metal including precious and semi-precious stones, in any form)
• Archaeological Collections
• Drawings
• Paintings
• Sculptures
• Any work of Art
• Bullion

Income arising from the sale/transfer of the above properties is categorised into two parts on the basis of the time period for which these properties are held by any person: (i) Short-Term Capital Gain and (ii) Long-Term Capital Gain. The holding period for treating the property as a long-term asset is different for each property, which is briefly stated as under:-

In present article, only the long-term capital gain from the sale of immovable property is discussed.

As evident from the above chart, if the immovable property is held for a minimum period of 24 months before the date of its sale/transfer, the said property shall be treated as long-term capital asset and consequently income arising from its sale shall be Long-Term Capital Gains. Various tax benefits are available on the income in the nature of Long-Term Capital Gains.

Let us understand the significance of some terms which are used while computing the Long-Term Capital Gains with the help of examples.

1. Full Value of Consideration:- As per section 50C, the term ‘full value of consideration’ is the amount that is taken as the sale value of the property for the purpose of calculating income from the sale of the immovable property. It depends upon the difference between the actual sale value of the property and its fair market value as per the stamp duty authorities. Normally there may be three situations to determine the full value of consideration, as illustrated below:-

Situation 1- Mr. A had purchased an immovable property during F.Y. 2003-04 for a consideration of Rs.25,00,000/-. He sold the same property in F.Y. 2022- 23 for a consideration of Rs.1,15,00,000/-. The stamp duty value of the property on the date of sale, let us presume, was Rs.1,10,00,000/-. Here since the actual sale consideration is more than the stamp duty value, ‘full value of consideration’ in this situation will be Rs. 1,15,00,000/-. In effect, stamp duty value will be ignored.

Situation 2- Mr. B purchased an immovable property during F.Y. 2003-04 for a consideration of Rs. 25,00,000/-. He sold the same property in F.Y. 2022- 23 for a consideration of Rs.95,00,000/-. The stamp duty value of the property on the date of sale was Rs.1,10,00,000/-. Here 110% of the actual sale consideration comes to 1,04,50,000/- (110% of 95,00,000/-). Since the stamp duty value of Rs.1,10,00,000/- is more than Rs. 1,04,50,000/- (110% of the actual sale consideration), the stamp duty value of Rs. 1,10,00,000/- shall be taken as the ‘full value of consideration’ for calculating the Capital Gain, although the property was sold for Rs. 95,00,000/-. In effect, actual sale consideration is ignored.

Risky situation: This situation poses real risk to the seller, as capital gains will be computed treating stamp duty value as the full value of the sale consideration. This situation also poses a real risk to the purchaser, as the difference between the stamp duty value and the actual sale consideration will be taxable in his hands u/s 56 as ‘Income from Other Sources’. There are remedies for this situation also, as the assessee can dispute the stamp duty value before the assessing officer. Once the objection is raised by the assessee, the assessing officer is legally bound to refer the valuation of the property to the departmental valuation officer.

Situation 3- Mr. C purchased an immovable property during F.Y. 2003-04 for a consideration of Rs.25,00,000/-. He sold the same property in F.Y. 2022- 23 for a consideration of Rs.1,05,00,000/-. The stamp duty value of the property on the date of sale was Rs. 1,10,00,000/-. Here, 110% of the actual sale consideration comes to 1,15,50,000/- (110% of 1,05,00,000). Since the stamp duty value of Rs. 1,10,00,000/- is less than 110% of the actual sale consideration of Rs. 1,15,50,000/-, the actual sale consideration of Rs. 1,05,00,000/- shall be taken as the ‘full value of consideration’ for calculating the Capital Gain. In effect, stamp duty value will be ignored.

The complete concept of adopting ‘full value of consideration’ in different situations for the calculation of Long-Term Capital Gains has been discussed at length in a separate article, the link of which is given hereunder:-

https://taxguru.in/income-tax/immovable-property-sold-stamp-duty-tax-impact-seller.html

2. Cost of acquisition:- For the purpose of calculation of Long-Term Capital Gains, the cost of acquisition is a very important factor. In common parlance, it means the purchase cost of the property. But under Income Tax Act, cost of acquisition changes in different situations, and it is essential to understand the concept of ‘cost of acquisition’ for proper computation of capital gains. How to determine the cost of acquisition is discussed below with the help examples.

Situation 1:- Cost of acquisition of property purchased/constructed on or after 01.04.2001:- In the cases where the property is purchased/constructed by a person on or after 01.04.2001, the total cost incurred for acquisition/construction of the property shall be treated as the cost of acquisition.

Example:– Let us assume that Mr. A purchased a flat for a total consideration of Rs. 40,00,000/- in F.Y. 2002-03. He paid stamp duty of Rs. 2,00,000/-, and registration charges of Rs. 30,000/-. In this case, cost of acquisition of the property shall be Rs. 42,30,000/- (Rs. 40,00,000 + Rs. 2,00,000 + Rs. 30,000).

Situation 2- Cost of acquisition of property purchased/acquired before 01.04.2001:- In the case of property, which was acquired before 01.04.2001, cost of acquisition shall be either the actual cost incurred or the stamp duty value of the property as on 01.04.2001, as per the option of the seller. Since in most of the cases, the stamp duty value as of 01.04.2001 is likely to be more, it is advisable to ascertain the same from the concerned Sub-Registrar’s office to get the benefit of the higher cost of acquisition. In case, the stamp duty value of the property as of 01.04.2001 cannot be gathered by the seller due to unavailability of this, the seller may take a report regarding the fair market value as of 01.04.2001 from the Registered valuer, but this may be subject to examination by the assessing officer.

Example:– Let us assume that Mr. B constructed a house in F.Y. 1994-95 for a total cost of Rs. 25,00,000/-. The stamp duty value or the value adopted by the registered valuer as on 01.04.2001 is Rs. 45,00,000/-, then Mr. B can take Rs. 45,00,000/- as the cost of acquisition for the purposes of calculation of Long-Term Capital Gain.

Situation 3- Cost of acquisition of property received on Inheritance, Will, or Gift:-

If any property is received by a person by way of inheritance or through a will or as a gift, although the present owner (the recipient) had not incurred any amount towards the cost of such property, please note that the benefit of the cost of acquisition is allowed to the present owner as a deduction on sale of such property for working out the capital gains.

(i) If the property received on Inheritance, Will, Gift was purchased/constructed by the original owner after 01.04.2001:- The cost of acquisition of such property shall be the cost incurred by the original owner of the property and the same will be allowed while calculating Long-Term Capital Gains in the hands of the recipient of the property.

Example :- Mr. A purchased a property for a consideration of Rs. 30,00,000/- in F.Y. 2002-03 and gifted the same to Mr. B in F.Y. 2006-07. Now Mr. B intends to sell it. Although Mr. B had not spent any money towards the cost of the property, he will be allowed the cost of the acquisition of the property at Rs. 30,00,000/- for the purpose of calculation of Long-Term Capital Gains, because the original owner had purchased it for Rs.30,00,000/-.

(ii) If the property received on Inheritance, Will, Gift, etc. was purchased/constructed by the original owner before 01.04.2001:- If the property was purchased/constructed by the original owner before 01.04.2001, the cost incurred by the original owner or the stamp duty value as on 01.04.2001, as per the option of the present holder of the property, shall be treated as the cost of the property. The same will be allowed while calculating Long-Term Capital Gains in the hands of the recipient of the property.

Example:– Mr. X purchased a property in F.Y. 1982-83 for a total cost of Rs. 25,00,000/-. In his will, Mr. X entrusted the property to Mr. Y. Mr. X died in F.Y. 2004-05 and the property was transferred to Mr. Y. Now Mr. Y intends to sell the property for a consideration of Rs. 2 Crore. The stamp duty value of the property as on 01.04.2001 is Rs. 80,00,000/-. In this situation, while calculating the Long-Term Capital Gains in the hands of Mr. Y, cost of the property shall be allowed at Rs. 80,00,000/-.

Very Important Point to Note about the holding period in the case of property received by way of Inheritance, Will, or Gift, etc., which is often asked:-

In the case of properties received by way of Inheritance, Will, Gift, etc., the holding period of the property by the previous owner shall be considered for the purposes of determining the property as Long Term or Short Term. Let us understand it with an example:

Mr. A purchased an immovable property in F.Y. 2005-06. He gifted the property to Mr. B on 01.05.2023. Now Mr. B wants to sell the property. Here the question arises whether Mr. B should wait till 01.05.2025 (24 months from 01.05.2023, the date of receipt of property as gift) to sell the property to get the benefits of Long-Term Capital Gain. The answer is that if Mr. B wants to sell the property, he can sell it immediately after receipt of the property. There is no need to wait till 01.05.2025 because the previous owner Mr. A has held the property for more than 24 months.

So, to summarise, in the case of properties received by way of Inheritance, Will, Gift, etc., all the benefits which otherwise were available to the previous owners, are also available to the present owner (the recipient) of the property for the calculation of Long-Term Capital Gains.

3. Indexed Cost of Acquisition:- This is the beneficial provision for the sellers while selling the property for the purposes of calculation of Long-Term Capital Gains. By indexing, the cost of the property increases, and so the increased indexed cost is allowed as a deduction from the sale consideration while computing the income as Long-Term Capital Gain. Starting at 100 from the base year 2001, every year the Government of India declares the Cost Inflation Index (in short, ‘CII’) for calculation of the Indexed cost of acquisition. The Financial Year wise value of the Cost inflation index is given in the following table:-

To get the Indexed cost of acquisition, the cost of acquisition is multiplied by the CII of the year of sale and the multiplied value is divided by the CII of the year of acquisition.

Let us understand the benefits of Indexed cost of acquisition from the following examples:-

Example 1:- Mr. A purchased a flat in F.Y. 2002-03 for a total cost of acquisition of Rs. 42,30,000/-. He sold the property in F.Y. 2022-23 for the full value of the consideration of Rs. 1,50,00,000/-. So, while calculating the Long-Term Capital Gain, indexed cost of acquisition shale be taken at Rs.1,33,34,571/- instead of the actual cost of Rs.42,30,000/-, as worked out below:-

Here the cost of the property was Rs. 42,30,000/- and Mr. A sold the same for a consideration of Rs.1,50,00,000/-. Thus, he earned a profit of Rs. 1,07,70,000/- (Rs. 1,50,00,000 minus Rs. 42,30,000). But due to the benefits of the Indexed cost of acquisition, the taxable income of Mr. A will be only Rs. 16,65,429/-, and not Rs. 1,07,70,000/-.

Example 2:- Mr. X purchased a property in F.Y. 1982-83 for a total cost of Rs. 25,00,000/-. In his will, Mr. X entrusted the property to Mr. Y. Mr. X died in F.Y. 2004-05 and the property was transferred to Mr. Y. in F.Y. 2004-05. Now Mr. Y intends to sell the property in F.Y. 2023-24 and the full value of sale consideration is Rs. 3 Crore. The stamp duty value of the property as on 01.04.2001 is Rs. 80,00,000/-. Mr. Y opted for the stamp duty value of Rs. 80,00,000/- as on 01.04.2001 as cost of acquisition. Now let us understand the benefits of the Indexed cost of acquisition and income in the hands of Mr. Y.

If any property is received by a person through Gift, Will, or Inheritance, the cost paid by the original owner to acquire the property or the stamp duty value/fair market value as on 01.04.2001 is allowed as the cost of the property to the person who received it. In the above example, although Mr. Y did not spend any money towards the cost of acquisition of the property, he was not only allowed the cost of the property (i.e., stamp duty value of the property) but also allowed indexation on the cost from 01.04.2001 onwards. Here Mr. Y sold the property for Rs. 3,00,00,000/-, which was acquired by him through will, his income from the sale of the said property will be taken at Rs. 21,60,000/- only.

This is the beauty and benefit of the Indexed cost of acquisition while selling the immovable property, which was held for more than 24 months.

4. Cost of Improvement and Indexed Cost of Improvement: –

Any expenditure which is of a capital nature incurred in making additions or alterations or improvements to the property is added to the cost of the property by way of cost of improvement. The additions or alterations which enhance the utility and worth of the property are of capital nature. Please note that expenditure only of capital nature is allowed as cost of improvement and routine expenses incurred to maintain the property are not allowable.

Further, cost of improvement also includes any expenditure incurred to protect or complete the title to the capital asset or to cure such title. For example, clearing of encumbrances on a property or getting the property vacated from unauthorised occupiers are also treated as cost of improvement.

The benefit of indexation on the amount treated as ‘cost of improvement’ is available from the year in which such expenditure is incurred and it is allowed as a deduction from the full value of consideration while calculating the income from the sale of the immovable property.

The allowability of the expenditure incurred on addition /alteration/improvement/alteration/renovation of the property and indexation of such expenditure in different situations is tabulated as under:-

The above situations are discussed below with the help of examples:-

Situation 1- When the property was purchased/constructed by the owner after 01.04.2001:- The expenditure incurred by the owner of the property on addition/alteration/improvement/alteration/renovation with indexation benefits are allowable from the F.Y in which such expenditure is made. Let us understand this with the help of the following example:-

Example:- Mr. A purchased a flat in F.Y. 2002-03 for a total cost of acquisition of Rs. 42,30,000/-. He spent Rs.3,00,000/- on improvement in F.Y. 2018-19. Mr. A sold it for a consideration of Rs.1,50,00,000/- in F.Y. 2022-23. So, while calculating the Long-Term Capital Gain out of the sale consideration of Rs.1,50,00,000/-, Mr. A will not only get the benefit of indexation on cost of the flat but also on the cost of improvement, as illustrated below:-

Here the cost of the flat was Rs.42,30,000/- and Mr. A incurred Rs. 3,00,000/- on its improvement. Mr. A sold the same for a consideration of Rs. 1,50,00,000/-, thus he earned a profit of Rs. 1,04,70,000/- ( Rs.1,50,00,000 minus Rs.45,30,000). But due to the benefits of the Indexed cost of acquisition and improvement, the taxable income of Mr. A will be only Rs. 13,10,786/-, and not Rs. 1,04,70,000/-.

Situation 2- When the property was purchased/constructed by the owner before 01.04.2001:- The expenditure incurred by the owner of the property on addition/alteration/improvement/alteration/renovation before 01.04.2001 is not allowable as deduction and indexation benefit is also not available on such expenses incurred before 01.04.2001. The expenditure incurred by the owner on improvement/alteration/renovation/addition of the property after 01.04.2001 only alongwith indexation benefit are allowable from the F.Y in which such expenditure is made. Let us understand this with the help of the following example:-

Example:- Mr. A constructed a house in F.Y. 1995-96 for a total cost of Rs. 25,00,000/-. He added one floor to the house in F.Y. 1998-99 and incurred an expenditure of Rs. 8,00,000/- on it. He further spent Rs. 3,00,000/- in F.Y. 2008-09 on the renovation of the house. Mr. A sold it for a consideration of Rs. 1,50,00,000/- in F.Y. 2022-23. The stamp duty value of the property as of 01.04.2001 was Rs. 40,00,000/-. The working of Long-Term Capital Gain in this situation shall be as under:-

As evident from the above, while calculating the Long-Term Capital Gain out of the sale consideration of Rs. 1,50,00,000/-, Mr. A did not get the benefit of indexation on the cost of improvement of Rs. 8,00,000/- which was spent by him in F.Y. 1998-99, i.e., before 01.04.2001 for adding one floor to the house, because the amount was spent before 01.04.2001. However, he got the benefit of indexation on the cost of improvement of Rs.3,00,000/- which was spent by him in F.Y. 2008-09, i.e., after 01.04.2001 and the indexed value of cost of improvement of Rs.7,24,817/- was deducted from the sale consideration received. Due to the benefit of the Indexed cost of acquisition and cost of improvement, the taxable income of Mr. A will be only Rs.10,35,183/- on the sale consideration of Rs. 1,50,00,000/-

Situation 3: When the property is received by the present owner through Inheritance, Gift. Will, etc.:- The expenditure incurred before 01.04.2001 by the original owner or the present owner on addition/alteration/improvement/alteration/renovation is not allowable as deduction and indexation on the same is also not allowable. However, if such expenditure is incurred after 01.04.2001 by the original owner or by the present owner, the same is allowable as deduction with indexation benefit from the F.Y in which such expenditure is incurred. Let us understand this with the help of the following example:-

Example:- Mr. X purchased a property in F.Y. 1982-83 for a total cost of Rs. 25,00,000/-. Mr. X spent Rs. 5,00,000/- on building the compound wall in F.Y. 1991-92. Mr. X incurred another Rs. 4,00,000/- on the improvement of the property in F.Y. 2002-03. In his will, Mr. X entrusted the property to Mr. Y. Mr. X died in F.Y. 2004-05 and the property was transferred to Mr. Y. in F.Y. 2004-05. Mr. Y spent 7,00,000/- on the renovation of the property in F.Y. 2015-16. Now Mr. Y intends to sell the property in F.Y. 2023-24 for a consideration of Rs. 3.25 Crore. The stamp duty value of the property as on 01.04.2001 is Rs. 80,00,000/-. Now let us understand the benefits of the Indexed cost of acquisition, indexed cost of improvement, and income in the hands of Mr. Y, who received the property through will.

Briefly stated, if any property is received by a person through Gift, Will, or Inheritance, the cost paid by the original owner to acquire the property or the stamp duty value/fair market value as of 01.04.2001 is allowed as the cost of the property with indexation benefit to the person who received it, i.e., the present owner. Further, the expenditure incurred by the original owner or the present owner on the improvement of the property after 01.04.2001 is also allowable as a deduction, and, that too, with indexation benefits to the present owner and thus the capital gains in the hands of the present owner on sale of property are substantially reduced. In the above example, although Mr. Y did not spend any money to acquire the property, he was allowed deduction for the cost of the property and the cost of the improvement incurred by him after 01.04.2001 on the property as well as the benefit of indexation on these costs. Here Mr. Y got Rs. 3,25,00,000/- from the sale of property received through will, but his income from the sale of the said property will not be taken at Rs. 3,25,00,000/- but shall be only Rs. 23,75,231/-.

Please note that when the cost of the property has been opted as on 01.04.2001 by the assessee, actual cost of the property and the cost of improvement done prior to 01.04.2001 become irrelevant.

5. Expenditure incurred wholly and exclusively in connection with the transfer:- If any expenditure has been made by the seller of the property wholly and exclusively for the purposes of selling it, such as brokerage or commission for securing a purchaser, legal and professional fees, cost of stamp fees and registration fees if paid by the seller, etc., the same is allowed as a deduction while calculating Capital Gains from the sale of immovable property. In short, the expression ‘expenditure incurred wholly and exclusively in connection with transfer’ means the expenditure which is essential for the purpose of effecting sale of the property.

Please note that vague expenses are not allowable. Expenses should be supported with valid documentary evidence.

Example:- Mr. A purchased a flat in F.Y. 2002-03 for a total cost of acquisition of Rs.42,30,000/-. Mr. A sold it for a consideration of Rs. 1,50,00,000/- in F.Y. 2022-23. He paid a brokerage of Rs. 2,00,000/- while selling the property. So, while calculating the Long-Term Capital Gain out of the sale consideration of Rs.1,50,00,000/-, Mr. A will also get the benefit of deduction of this expenditure:-

Here the cost of the property was Rs.42,30,000/-. Mr. A sold the same for a consideration of Rs. 1,50,00,000/- and paid brokerage of Rs. 2,00,000/- on sale. Thus he earned a profit of Rs. 1,05,70,000/- (Rs.1,50,00,000 minus Rs.42,30,000 minus Rs.2,00,000). But due to the benefits of the Indexed cost of acquisition and deduction of brokerage, the taxable income of Mr. A will be only Rs. 14,65,429/- and not Rs. 1,02,70,000/-.

Here it is pertinent to mention that once the taxes are paid on the income from Long-Term Capital Gains, the total consideration received from the sale of the property becomes tax-paid money. After paying the taxes, the seller is free to utilise the same as per his/her wish. To make it clear let us understand from the above example. As per the calculation, the Long-Term Capital gain from the sale consideration of Rs. 1,50,00,000/- comes to Rs. 14,65,429/-. The income tax payable on Rs. 14,65,429 is only about Rs. 3,25,000/-. So if Mr. A pays this tax of Rs. 3,25,000/-, the entire consideration of Rs. 1,50,00,000/- will be treated as tax paid money of Mr. A and he may utilise Rs. 1,50,00,000/- as per his wish.

Advice to the person who possesses immovable properties:-

People keep selling and buying properties but do not pay much attention to the taxation part. From the discussion in the present article, it can be seen that there are various beneficial provisions available which help in reducing tax liability from the income generated from Long-Term Capital Gains from the sale of immovable properties. It is seen that many people lose various tax benefits while selling their property for want of proper Tax Advice and poor upkeeping of documents. Please engage a Tax Advisor before entering into any property transaction. The proper documentation will help to get various tax benefits while selling the property by the owner of the property or by the successors/heirs. It is advised to keep the following evidences with the property documents:-

• Bank statement highlighting the entries therein relating to the payments for the acquisition of the property.
• Bank statement through which the stamp duty and registration charges are paid alongwith payment receipts.
• Copy of possession letter issued by the builder, if purchased from any builder.
• Details of all payments made to the contractor with their bills and relevant bank statement reflecting the payments made for construction of the property.
• Bank statement and related documents for the payment to any statutory authority, development authority, or municipal corporation for the transfer of the property in your name.
• Bank statement, bills and details of work carried out for any addition, alteration, renovation, etc. in the property, which shall help to claim the indexed cost of the improvement. Many people do not preserve this which results in losing a good amount in taxes.
• Stamp duty valuation/valuation from a registered valuer of the property as on 01.04.2001, if it is purchased/constructed before 01.04.2001.
• If the property is received through Will, copy of the Will and all relevant documents of acquisition and improvement of property by the original owner and bank statement establishing investment/expenditure made by the original owner for the acquisition and improvement of the property.
• If the property is received as Gift, the registered Gift Deed with all relevant documents and bank statements establishing investment/expenditure made by the original owner for the acquisition and improvement of the property.
• If it is the Inherited Property, copy of the family arrangement establishing the share of each beneficiary, as the Long Term Capital Gain will be taxed in the hands of each beneficiary on the basis of his/her share in the ancestral property.

Various exemptions are available to save the taxes on Long-Term Capital Gains such as exemption u/s 54/54B/54EC/54F/54GB of the Income-tax Act, 1961. The same will be discussed in subsequent articles.

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For any query or professional consultation on Income-Tax provisions, while entering into any property transaction, the Author may be contacted through email- at [email protected] or through WhatsApp at +91 9967745680