What Is Capital Gain?
A capital gain refers to the profit or loss arising from the sale of a capital asset. If an asset is sold, it can yield either long-term or short-term capital gains, depending on the holding period. Conversely, if the sale produces a loss, it is classified as a capital loss. The tax obligation on capital gains arises in the fiscal year when the capital assets are sold.
Capital Gains Tax on the Sale of Real Estate
Capital gains can be categorized based on the duration the capital asset is held.
- Long-Term Capital Gain (LTGG) or Long-Term Capital Loss (LTCL): When a taxpayer transfers ownership of immovable property or land that has been held for over 24 months, the resulting gain or loss is recognized as a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).
- Short-Term Capital Gain (STCG): Conversely, if immovable property or land is sold after being held for 24 months or less, any gain or loss from this sale is deemed a Short-Term Capital Gain (STCG) or Short-Term Capital Loss (STCL).
According to the Income Tax Act, immovable property, including land, is classified as a capital asset. Therefore, when such property is sold, the resulting income or loss is reported as Capital Gains within an Income Tax Return and is subject to taxation at the relevant rates. The specific type of capital gain dictates the applicable capital gains tax on property sales, differentiating between long-term and short-term classifications. STCG on immovable properties is taxed according to slab rates, while LTCG is levied at a flat rate of 20%, with indexation benefits provided under Section 112 of the Income Tax Act.
Income Tax on the Sale of Land
The taxation rules regarding immovable properties—such as land, buildings, and houses—align with those governing other capital assets.
Calculation of Long-Term Gain Tax on Property Sales in India
In India, LTCG derived from the sale of immovable property is taxed at 20%, factoring in the indexation benefit as stipulated by Section 112 of the Income Tax Act. To maximize benefits through indexation, taxpayers calculate the long-term capital gain by evaluating the indexed acquisition cost, leveraging the Cost Inflation Index (CII). The cost of improvements accounts for expenditures made to enhance or modify the capital asset. The taxpayer can similarly compute the Indexed Cost of Improvement using the CII.
Breakdown of Calculation
Particulars Amount
Sales Consideration
Less Transfer Expenses
Less Indexed Cost of Acquisition
Less Indexed Cost of Improvement
Less Exemption under Sections 54 to 54GB
Long-Term Capital Gain
- Sales Consideration: For immovable assets, this should correspond to either the offer made for the capital asset or the value established by the stamp duty valuation authority under Section 50C of the Income Tax Act.
- Transfer expenses: Costs specifically incurred to sell a capital asset.
- Cost of Acquisition: (CII of Sale Year / CII of Purchase Year) = Indexed Cost of Acquisition
- Cost of Improvement: (CII of Sale Year / CII of Improvement Year) = Indexed Cost of Improvement
- Capital Gain Exemption: Eligible taxpayers can seek a capital exemption as detailed under Sections 54 to 54GB.
Calculation of Short-Term Capital Gain Tax on the Sale of Property in India
Short-term capital gains from real estate sales are taxed according to slab rates, without provision for indexation benefits in the case of short-term capital gains. Additionally, exemptions via Sections 54 to 54GB are limited. Therefore, the calculation of capital gains considers the acquisition costs, improvement costs, and transfer costs.