Selling a property or land can result in a capital gains tax liability. Many property owners, however, may not be fully aware of how the tax is calculated or when indexation benefits can apply.
Under income tax rules, the profit earned from the sale of a capital asset is generally treated as a capital gain. For immovable property such as land or buildings, the period for which the property was held determines whether the gain is treated as long-term or short-term. The holding period for immovable property is 24 months.
LTCG and STCG on Property
If an immovable property is held for more than 24 months before being sold, the resulting gain is treated as a long-term capital gain (LTCG). If it is sold within 24 months, the gain is treated as a short-term capital gain (STCG).
The tax is calculated on the taxable gain arising from the transaction rather than simply on the property’s total sale value.
For long-term capital gains on immovable property, the tax rules changed from July 23, 2024. The long-term capital gains rate was reduced to 12.5 per cent without indexation for transfers on or after that date.
What Happened to the Indexation Benefit?
The 2024 tax changes removed the general indexation benefit for property transfers covered by the new 12.5 per cent regime. However, a special provision applies to resident individuals and Hindu Undivided Families (HUFs) where the property was acquired before July 23, 2024.
In such cases, the tax rules provide a comparison mechanism between the 12.5 per cent calculation without indexation and the 20 per cent calculation using indexation. The benefit is relevant where the property was acquired before July 23, 2024. Current Income Tax Department documents continue to provide for this computation under the second proviso to Section 112(1)(a).
This means taxpayers should not assume that every property sale automatically qualifies for indexation. The acquisition date, transfer date and taxpayer’s residential status are important when determining the applicable calculation.
Example of LTCG Calculation
Suppose a property was purchased in 2003 for ₹2 lakh and is later sold for ₹10 lakh. Under the indexation calculation used in the example, the inflation-adjusted purchase cost is ₹7.26 lakh, using the factor of 363/100.
The resulting long-term capital gain would therefore be ₹2.74 lakh. At a 20 per cent tax rate, the tax on this gain would be ₹54,800, before considering any other applicable provisions.
Under the calculation without indexation, the original purchase cost remains ₹2 lakh. The gain would then be ₹8 lakh. At 12.5 per cent, the tax would be ₹1 lakh.
The example shows why the applicable calculation can make a substantial difference to the tax amount. The actual liability can depend on the property’s acquisition date, transfer date and the taxpayer’s circumstances.
Why the Calculation Matters
Consider another example in which a property purchased for ₹2 lakh is sold for ₹4 lakh. The gain in this case is ₹2 lakh.
At a 12.5 per cent tax rate, the tax on a ₹2 lakh gain would be ₹25,000, before considering other applicable provisions.
Property sellers should therefore calculate their capital gains carefully instead of simply applying a tax rate to the sale price. The applicable rules, acquisition details and available deductions can affect the final taxable amount.
Anyone selling property should check the applicable capital gains provisions for the relevant transaction before filing their tax return. Where the calculation is complex, professional tax advice can help ensure that the correct provisions are applied.