There is not much time left for taxpayers to file their income tax returns (ITRs). With so much information available on the web regarding the calculation of income from salaries and other sources, many people have found it easy to file their ITR themselves. However, those who had sold their properties this year are now inquiring about how to calculate the capital gain on the sale of a property.
Understanding capital gains
To understand what “capital gain” is and how it is taxed, we must first understand the meaning of “capital asset”. Taxpayers must know that not all land or properties classify as “capital assets”.
For example, “agricultural land” is not a capital asset and, hence, the sale of agricultural land does not qualify as a capital gain. Other than agricultural land, the sale of any kind of land or building would invite capital gain on which tax would be levied at the time of transfer during the sale.
Capital gain tax is not uniform as a lot depends on whether the capital gains to be taxed are long-term or short-term in nature. Capital gains on property sold after having held it for two years can be classified as “long-term capital gains” and hence will be taxed under “long-term capital gains tax”.
However, if the property has been sold within two years from the date of purchase, the earnings from the sale of such property would be classified as “short-term capital gains” and, hence, taxed under “short-term capital gains tax”.
How are capital gains taxed?
Long-term capital gains are taxed at 20 per cent plus the applicable surcharge and cess. Short-term capital gains are taxed at the rates mentioned in the income tax rates slab for that financial year.
Hemal Mehta, Partner at Deloitte India said, “Capital gains are worked out by reducing the transfer expenses and the indexed cost of acquisition (‘CoA’) from the full value of the consideration (‘FVOC’). In the case of a land/building, such FVOC should be the minimum stamp duty value (‘SDV’) of such property, however, a safe harbour limit of up to 10 per cent is allowed. In other words, if SDV is more than 110 per cent of the sale consideration, then such SDV shall be deemed to be FVOC. Capital gains taxpayers are also allowed an indexation of the cost incurred on acquiring and improving the asset.”
The onus of tax deductions
The onus of paying the taxes lies with the buyer of the property. This means that those who had purchased the property must deduct the tax on the seller’s behalf at one per cent of the total consideration amount. However, this rule applies only when the sale consideration amount is more than ₹50 lakh.
Also, if the buyer has paid in instalments, then every instalment would be subjected to tax deducted at source (TDS). The buyer is liable to undertake compliances related to tax withholding. The sellers can avail the credit of the TDS while filing their ITRs.
Calculating capital gains tax
Evaluating the capital gains from the sale of any property is not difficult. All you must do is apply the following formulae for the estimation of these taxes.
- Short-term capital gains: Final sale price – (cost of acquisition + expenses incurred on improvement or modification of the property sold + cost on sale of the property).
- Long-term capital gains: Final sale price – (indexed cost of property acquisition + indexed cost incurred on improving or altering the property design and structure + expenditure on sale of the property).
The last date for filing your ITRs is just around the corner, i.e., July 31 this year. Make sure that you have clarity on the kinds of taxes and the income heads under which they must be filed.