This article talks about understanding capital gains tax calculations and computing offsets vs other income.
Originally published: 28-Jan-2022
Updated: 02-Feb-2022 - updated post the Union budget in Feb-2022
Updated: 29-Jun-2022 - declaration of CII for FY 2022-23
Updated: 02-Feb-2023 - updated post the Union budget in Feb-2023
Updated: 23-Jul-2024 - updated post the Union budget in Jul-2024 for changes in capital gains taxation
Disclaimer: Taxation is a dynamic concept and the content of this article is valid on the date of publication and any subsequent updates. Always consult a professional tax advisor before doing anything that leads to taxes being due.
This article is a part of our detailed article series on the concept of mutual fund taxation in India. Ensure you have read the other parts here:
This articles discusses some benefits and drawbacks of storing your mutual funds in demat mode with one killer feature that makes transmission possible.
This article shows the way forward for investors in debt, gold, hybrid and international funds which have lost indexation benefits on units purchased after 1st April 2023.
This article settles the question of which type of capital gain calculation is better - debt-type funds taxed at 20% with indexation vs equity-type at 10%.
Capital gains come from selling a capital asset like shares, mutual funds or real estate. Tax on capital gains depends on the holding period (short or long, leading to STCG and LTCG). The tax rate is considered ‘tax on special rates’, which is separate from slab-based tax on income.
Capital gains are taxed as
listed shares and mutual funds with more than 65% domestic equity: 15% tax for STCG (<1 year) or 10% tax on LTCG (with grandfathering) above ₹1 lakh. No tax if this LTCG is less than a lakh
all other mutual funds: tax at slab rate for STCG (<3 year) or 20% tax after indexation on LTCG
real estate: tax at slab rate for STCG (less than 2 years) or 20% tax after indexation on LTCG (before 23-Jul-2024). Post Union Budget 2024, indexation has been removed and LTCG rate changed to 12.5%
Cess at the applicable rate (currently 4%) should be added to the tax.
This article assumes that the investor understands the basics of capital gains taxes for selling shares and mutual funds as per this article: How is tax calculated on selling shares/MFs and how do to do tax harvesting?. For real estate, the holding period is short-term for less than two years, and otherwise, it is long-term.
Capital assets for the purpose of this article are shares, mutual funds, bonds(SGB, corporate, State government and RBI bonds), and real estate. However, suppose the asset is sold as a part of a business function, for example, a real-estate investor who buys and sells property via their company. In that case, it is considered stock-in-trade and not a capital asset.
Capital gains must be considered using data from the point of purchase or construction (like that of a house) by the original owner. This means that even if the property is transferred (by inheritance) or gifted, the original owner’s costs will be used to calculate capital gains.
The tax on long-term capital gains is lowered by the concept of indexation. Indexation allows you to benefit from depreciation in the value of the asset and inflation by adjusting the purchase price upwards by a factor, published yearly by the Income Tax department, called Cost Inflation Index (CII). In general, assets with indexation benefit on the purchase price, irrespective of appreciation, will lead to lower taxes the longer they are held. Of course, you should not keep capital blocked solely to have the benefit of indexation but a bit of planning is important.
FAQs on capital gains for real estate
What is the purchase date of the property for capital gains calculation purpose?
The purchase date of the property for capital gains calculation purpose is the date of the allotment letter. There could be multiple options for choosing the start date like allotment letter date, registration date or possession date. However, the correct option is the allotment letter date.
What is the calculation method for capital gains from selling land?
Capital gains are calculated in the same way on selling land like property.
As the above table shows, it is easy to calculate the indexed purchase price. In the table above, an asset purchased in FY 2008-09 (CII = 137) and being sold in FY 2017-18 (CII = 272), will have an indexed purchase price of ₹198.54.
We take the example of a debt mutual fund purchased in 2015 and sold in 2020
CII at purchase is 254, CII at sale is 301
Purchase value is ₹10,000
Sale value is ₹15,000
Indexed purchase price is ₹10,000 * (301/254) = ₹11,850
LTCG = ₹15,000 - ₹11,850 = ₹3,150
Here we see that the LTCG is lower than the simple profit of ₹5,000 due to the benefit of indexation. In the case of real estate, under Section 50C, the sale value is the maximum of the actual sale price and fair market value of the property determined using circle rates or similar means. Also, the buyer of the property has to deduct 1% of the sale value as TDS and deposit that to the income tax authorities in case the sale proceeds exceed ₹50 lakhs. The seller has an option of claiming this amount while filing tax return.
LTCG example using real estate purchased after 2001
We take the example of an apartment purchased in 2010 and sold in 2018
CII at purchase is 167, CII at sale is 280
Purchase value is ₹15 lakhs
Sale value is ₹40 lakhs
Indexed purchase price is ₹15 * (280/167) = ₹25.15 lakhs
LTCG = ₹40 - ₹25.15 = ₹14.85 lakhs
The LTCG can be adjusted downwards by any additions and alteration expenses which is called the “Cost of improvement”
LTCG example using real estate purchased before 2001
The CII starts at 100 for the FY 2001-02. So we need to know the house price in 2001 by using the services of a government-approved assessor. Once that is done, we can proceed in the same way as the previous case with one change: Cost of improvement expenses that have taken place before 2001 will not be considered.
We take the example of a house constructed in 1995 and sold in 2018
CII in 2001 is 100, CII at sale is 280
Assessed value of the house is ₹30 lakhs (irrespective of the money spent on construction and improvements up to 2001)
Original owner died in 2008 and the property was passed on to their legal heir, who sold the house in 2018
Renovation done in 2010 is ₹5 lakhs
Sale value is ₹1 crore
Indexed purchase price is ₹30 * (280/100) = ₹84 lakhs
Indexed renovation cost is ₹5 * (280/167) = ₹8.4 lakhs
LTCG = ₹100 - ₹84 - ₹8.4 = ₹7.6 lakhs
Tax on this LTCG is to be paid by the seller. Zero tax will be paid if ₹7.6 lakhs is invested in Sec54EC eligible bonds for 5 years (see below)
Impact of Union Budget 2024 on capital gains tax calculation
In a surprise move, Union Budget 2024 removed the concept of indexation and dropped the capital gains tax rate from 20% for 12.5% for all property sales on or after 23-Jul-2024.
Offsetting allows you to reduce the net tax payable as per these rules
Long term capital loss is allowed to be offset only against LTCG
Short term capital loss is allowed to be against either LTCG or STCG
You can carry forward both short and long term capital losses for eight years as long as you keep filing yearly returns (typically in ITR2 or above, not ITR1)
This concept of offsets allows you to reduce taxes in future years. For example, you have ₹5 lakhs loss from selling a house in 2020. You can keep using that loss against profits in the following years as long as:
you keep filing returns every year
the loss is offset using the two rules above (LTCL vs LTCG, STCL vs both LTCG/STCG)
eight years have not passed
you have not exhausted the loss amount. This means that if in 2021 you are offsetting ₹3 lakhs of LTCG, only ₹2 lakhs can be carried forward from that point onwards
Capital gains and no other income
Imagine the situation of an investor with only capital gains from stocks/MF as taxable income. Salary, interest income and other income are taxed at the slab rate, and capital gains are taxed at special rates as discussed above. However, the basic ₹2.5 lakhs exemption limit (₹3 lakhs for senior citizens) applies here as well.
You do not pay any tax if total income plus taxable capital gains (after all offsets within capital gains and losses) does not exceed ₹2.5 lakhs. Taxpayers should also check if they are eligible for a rebate under Section 87A to reduce their taxes by a further ₹12,500 if their total income is under ₹500,000.
In the ₹7.6 lakhs LTCG example, if the assessor is a senior citizen (60+ age) with ₹1 lakh income from interest and no other income, then the tax will be like this:
Basic exemption limit is ₹3 lakhs
Adjust ₹1 lakh interest income against this first. ₹2 lakh limit is left
Adjust the ₹2 lakh against the LTCG of ₹7.6 lakhs, and LTCG tax will now be payable only on ₹5.6 lakhs
NRIs cannot offset capital gains against the basic exemption limit.
A caveat on using basic exemption limit to reduce taxes:
Investments made in the name of family members in lower tax brackets fall under income clubbing rules though gifts are tax-free. For example, if you give ₹5 lakhs to your parent as a gift and that amount is invested. The parent has no other income. After five years, the asset is sold, and LTCG is ₹2 lakhs. Here, the proper practice from a taxation perspective is to consider this income be clubbed with yours and not eligible for exemption in the parent’s name.
More situations and references are available here from incometaxindia.gov.in website:
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This post titled How to calculate taxes from capital gains and combine them with your other income first appeared on 28 Jan 2022 at https://arthgyaan.com
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