Capital Gains Tax on the Sale of Property
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What are capital gains on the Sale of Property?
Capital gains arise when a property is sold for a profit. These are classified into two categories:
- Long-term Capital Gains: Applicable if the property is held for more than 24 months before the sale.
- Short-term Capital Gains : Applicable if the property is sold within 24 months of acquisition.
Tax Rates for Sale of Property:
Tax rates differ based on the classification of gains:
Particulars | STCG on Property | LTCG on Property |
Tax Rates | Slab rate | Option 1: 20% with indexation (for sales before 23rd July 2024) Option 2: 12.5% without indexation (for sales on or after 23rd July 2024) |
Calculation of Tax on Gains
- Short-term Capital Gains : STCG is taxed as per the individual’s applicable income tax slab rate. Formula:
- Sale Consideration – Cost of Acquisition – Cost of Improvement – Transfer Expenses = Short-term Capital Gain
Example: If STCG is Rs. 6,00,000 and the taxpayer falls under the 30% tax bracket: Tax: 31.20% of Rs. 6,00,000 = Rs. 1,87,200
Long-term Capital Gains : For property sales after 23rd July 2024:
- Option 1: 12.5% tax without indexation
- Option 2: 20% tax with indexation (only for properties acquired before 23rd July 2024)
Formula with Indexation: Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement – Transfer Expenses = Long-term Capital Gain
Indexation Formula: Indexed Cost of Acquisition = Cost of Acquisition × (CII of Sale Year / CII of Acquisition Year or FY 2001-02, whichever is later)
Example : Mr. A purchased a property for Rs. 20,00,000 on 1st Jan 2017 and spent Rs. 2,00,000 on improvements in 2020. He sells it for Rs. 60,00,000 on 1st May 2024.
Particulars | Amount |
Sale Consideration | Rs. 60,00,000 |
Indexed Cost of Acquisition | Rs. 27,50,000 |
Indexed Cost of Improvement | Rs. 2,66,911 |
Long-term Capital Gain | Rs. 29,83,089 |
LTCG Tax @ 20% | Rs. 5,96,618 |
Example : If the same property is sold in August 2024:
Particulars | Amount |
Sale Consideration | Rs. 60,00,000 |
Cost of Acquisition | Rs. 20,00,000 |
Cost of Improvement | Rs. 2,00,000 |
Long-term Capital Gain | Rs. 38,00,000 |
LTCG Tax @ 12.5% | Rs. 4,75,000 |
Analysis of Section 2(47) defines “transfer”
Definition: Under Section 2(47) of the Income Tax Act, 1961, defines “transfer” comprehensively to include various transactions involving a capital asset. The term encompasses:
- Sale: Transfer of a capital asset for consideration via agreements or legal instruments.
- Exchange: Swap of one capital asset for another.
- Relinquishment: voluntary surrender of a capital asset without consideration (e.g., gifts).
- Extinction: destruction or loss of a capital asset without consideration (e.g., due to natural disasters).
- Compulsory Acquisition: Acquisition by government or authority under law, such as eminent domain.
As per Section 45, profits or gains arising from the “transfer of a capital asset” are chargeable to income tax under the head “Capital Gains,” except in cases where exemptions under provisions like Section 54 apply.
Notable Judicial Precedents: The below interpretations in deferent matter ensure comprehensive tax coverage and deter attempts to evade capital gains tax through technicalities or innovative transaction structures.
- Transfer Includes De Facto Enjoyment of Immovable Property
- In CIT vs. Balbir Singh Maini (2017), the Hon’ble Supreme Court interpreted Section 2(47)(vi), holding that a transaction enabling the enjoyment of immovable property as a “purported owner” constitutes a transfer.
- Principle: The expression “enabling the enjoyment of” must align with the concept of “transferring,” applying the maxim noscitur a sociis.
- Date of Transfer Agreement as Transfer Date :
- ITAT Mumbai ruled that the execution date of a registered transfer document is relevant for determining the date of transfer, irrespective of possession or registration.( In Shankala Realtors Pvt Ltd vs. ITO (2019),)
- Section 47 of the Registration Act affirms that a registered document operates from the date of its execution.
- Reduction of Share Capital Constitutes Transfer : the Supreme Court held that the reduction of share capital leading to proportional reduction in shareholding qualifies as a transfer under “sale, exchange, or relinquishment.” (In Principal CIT vs. Jupiter Capital Pvt. Ltd.)
- Single Transactions Qualify as Transfers : the SC held that even a one-off transaction of purchase and sale of a capital asset can result in capital gains, irrespective of its nature as trade or business. (In CIT vs. Shaw Wallace & Co Ltd (2001))
- Exchange of Shares as Transfer : the SC held that exchanging shares of one company for those of another amounts to a transfer, making such transactions taxable. (In M/S Orient Trading Company Ltd vs. CIT)
- Agreement to Sell as Transfer : The SC observed that entering into a sale agreement coupled with a power of attorney, conferring possession and enjoyment of property, qualifies as a transfer under Sections 2(47)(v) and (vi). (in M/s Seshasayee Steels P. Ltd. (2019))
Key Trends in Taxation of Transfers:
- Broad Interpretation: Courts have broadened the scope of “transfer” to include de facto ownership rights and non-traditional transactions like share capital reductions.
- Focus on Substance Over Form: Tax authorities increasingly emphasize the essence of transactions rather than their technical structuring.
- Increased Scrutiny of Agreements: Agreements enabling possession or indirect ownership of property are considered potential transfers.
- One-Time Transactions: Even sporadic transactions are being treated as taxable events, aligning with the principle of capturing all gains arising from asset transfers.
- Clarity on Exchange Transactions: Share exchanges and asset swaps have been unambiguously included under the ambit of “transfer.”
Tax Planning In case of capital Gain – Key Considerations
- Classify gains accurately as STCG or LTCG.
- OPT for indexation to reduce tax liability for LTCG (if eligible).
- File ITR timely to claim exemptions and carry forward losses.
- Maintain clear records of all payments made towards the new property, including their dates and sources of funds. Ensure the sale deed of the new property clearly reflects the connection to the capital gains.
- In case Capital Gains Account Scheme. If there is unutilized capital gain from the sale, deposit it in a Capital Gains Account Scheme before the due date of filing the return.
- Exemptions under Sections 54/54F/54EC : Invest gains in a new residential property or specified bonds to claim tax exemptions.
- For properties acquired before 1st April 2001, use the higher of the actual cost or Fair Market Value as of 1st April 2001 for tax computations. Obtain valuation from a registered valuer to maximize the cost of acquisition.
- Loss Set-off and Carry Forward : Filing ITR before the due date is mandatory to carry forward losses
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- Long-term Capital Loss: Offset against LTCG and carry forward up to 8 years.
- Short-term Capital Loss: Offset against both STCG and LTCG; excess losses can also be carried forward for 8 years.