Any profit that an individual makes after selling a ‘capital asset’ is called a Capital Gain. As this gain is considered to be an income, there is a tax attached to it which has to be paid in the same year that the capital asset is sold. It should be noted that when a capital asset is inherited or bequeathed, it is not considered to be a capital gain, as it is a transfer but not a sale. Nevertheless, if the individual who has inherited the property sells it, then the capital gain will be applicable for taxation. This tax is called the Capital Gains Tax.
When computing the capital gains on the sale of a house, the following things should be kept in mind:
When someone purchases a house with the help of a home loan and then sells that house within 5 years, the tax benefits that have been claimed by him, under Section 80C, will be reversed. The tax deductions that were claimed during the previous years, will be regarded as a part of his total income of the year when the house was sold. The deduction claimed on the interest payment under Section 24B is left untouched.
When someone sells his house within three years of purchasing it, the profits that are earned from the sale are called short-term capital gains. The short-term capital gains are taken as a part of your income and therefore you are charged with a tax, depending upon the slab that you fall into.
When someone sells his house after completing three years from the date of purchase, the profits that are earned from the sale are called long-term capital gains. After the indexation, the profit will invite a tax that will be 20%. Unlike the case of short-term capital gains, here, tax exemptions are claimable.
For calculating short-term capital gains the total of the following costs are subtracted from the total selling price of the house:
For calculating short-term capital gains the total of the following costs are subtracted from the total selling price of the house:
To learn how to calculate capital gains tax on house sale, let’s take a look at the following calculations:
As explained earlier, a short-term capital gain occurs when the house is sold within three years of purchasing it. To find out the short-term capital gains, we need to calculate the difference in the cost of purchase of the house and the sale price of the house. The tax that is to be levied on these short-term capital gains, depends on the slab in which the taxpayer falls. It could be 5%, 20% or 30%.
| Particulars | Amount INR |
|---|---|
| Sale Price of the house | XXXX |
| MINUS: The expenditure made on transfer such as commission etc. if any | XXXX |
| Net Sale Consideration | XXXX |
| MINUS: Price of acquisition of the House | XXXX |
| MINUS: The expenditure made on the improvement of the house, if any | XXXX |
| Short-Term Capital Gain | XXXX |
An example will help in knowing how to calculate capital gains tax on house sale.
On 20 June 2012, Mr. Sharma bought a house worth INR 50 lakhs. He spent INR 1.3 lakhs on renovating the house, but he wasn’t very happy with it so he sold it in September 2014 for INR 65 lakhs. His agent charged him INR 70,000.
In this case, as the house is sold further in less than 3 years, we categorise it as a Short Term Capital Gain. Now let us see how the gain is to be calculated.
| Particulars | Amount INR |
|---|---|
| Sale Price of the house | 65,00,000 |
| MINUS: The expenditure made on transfer such as commission etc. if any | 70,000 |
| Net Sale Consideration | 64,30,000 |
| MINUS: Price of acquisition of the House | 50,00,000 |
| MINUS: The expenditure made on the improvement of the house, if any | 1,30,000 |
| Short-Term Capital Gain | 13,00,000 |
So, we can see that Mr. Sharma made INR 13,00,000 as short-term capital gains. This amount will now attract a tax of 30% as per the prevalent slab of Income Tax, which would amount to INR 3,90,000.
As explained earlier, a long-term capital gain occurs when the house is sold after completion of three years from the date of its purchase. We can calculate the long term capital gains tax on house sale by finding out the difference in the selling price of the house and the cost of indexation of the house.
To find out the indexation factor we have to divide the cost of inflation index in the year of sale by the cost of inflation index in the year of purchase. After this, we can find out the cost of indexed acquisition by multiplying the actual purchase cost of the house with the indexation factor.
| Particulars | Amount INR |
|---|---|
| Sale Price of the house | XXXX |
| MINUS: The expenditure made on transfer such as commission etc. if any | XXXX |
| Net Sale Consideration | XXXX |
| MINUS: Price of Indexed acquisition of the House | XXXX |
| MINUS: The expenditure made on the improvement of the indexed house, if any | XXXX |
| Gross Long-Term Capital Gain | XXXX |
| MINUS: The eligible exemptions under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G | XXXX |
| Net Long Term Capital Gain | XXXX |
An example will help in knowing how to calculate capital gains tax on house sale.
On 14 February 2010, Mr. Kamal bought a house worth INR 45 lakhs and in September 2015 he sold it for INR 95 lakhs. He spent INR 5 lakhs on improving the house, His agent charged him INR 1 lakh.
In this case, as the house is sold further after 3 years, we categorise it as a Long Term Capital Gain. Now let us see how the gain would be calculated. We will have to do this calculation in the simple steps given below:
The cost of inflation index for purchase that was made in 2010 is-711 whereas, in the year of sale the cost inflation index is 1081. Indexation factor will, therefore, be 1081/711, which is equal to 1.52.
We need to multiply the price of purchase and the indexation factor, so it is 45,00,000 X 1.52= 68,40,000.
For this, we need to multiply the cost of the home improvement, which here amounts to INR 5 lakh and an indexation factor of 1.52. So, Indexed Home improvement Cost is INR 5 lakh X 1.52 = INR 7,60,000.
| Particulars | Amount INR |
|---|---|
| Sale Price of the house | 95,00,000 |
| MINUS: The expenditure made on transfer such as commission etc. if any | 1,00,000 |
| Net Sale Consideration | 94,00,000 |
| MINUS: Price of Indexed acquisition of the House | 68,40,000 |
| MINUS: The expenditure made on the improvement of the indexed house, if any | 7,60,000 |
| Gross Long-Term Capital Gain | 18,00,000 |
| MINUS: The eligible exemptions under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G | -Nil- |
| Net Long Term Capital Gain | 18,00,000 |
What are short term capital gains?
When someone sells his house within three years of purchasing it, the profits that are earned from the sale are called Short-term capital gains.
How does home loan affect the Capital Gains computation on Sale of a House?
If a house is purchased through a home loan, and then that house is sold within 5 years, the tax benefits that have been claimed, under Section 80C, will be reversed. The deduction claimed on the interest payment under Section 24B is left untouched.
What are long term capital gains?
When someone sells his house after three years of purchasing it, the profits that are earned from the sale are called long-term capital gains.
I received a new house as a wedding present from my grandparents. Will it be taxable?
No, a property that is inherited is not taxable for the receiver.
I purchased a house in 2017 September, but now I want to sell it. Should I sell it now or wait for three-year-period to be over?
The liability that comes under short-term capital gains is generally very high, especially if you come in the category of higher income. It is recommended that you plan to sell your house only after 3 years to shift into the slot of long-term capital gains.
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