You may sell your property in any situation. In such a case, you receive an amount for your dealing. This amount is subject to tax. You are liable to pay income tax for the amount you gain from selling your property. This amount is called Capital gain. You cannot avoid income tax on the sale of a property. Let us dive deep into Income Tax on sale of property calculator.
Capital gain is the profit you get from selling a ‘capital asset’ Capital assets are investments like houses, land, stocks, mutual funds, jewelry, trademarks, etc. The gain/profit is considered an ‘income’; thus, you should pay tax for that amount in the same year you moved the capital asset.
If you inherit a property, you need not pay tax on capital gains as there is only a transfer of ownership and no sale. The Income Tax department has exempted the assets acquired as gifts or inherited. However, if you plan to sell your inherited property, you should pay income tax on the sale of a property.
How is capital gains tax calculated on a property?
The capital gain you acquire may be short-term or long-term capital gain. If you have held the property for 24 months or less while selling, it comes under the short-term capital gain. These properties include immobile properties like buildings, houses, or land.
While if you have the property for more than 36 months, it comes under the long-term capital gain.
In the case of short-term capital gain, you will arrive at the gain as:
Capital gain = Final sale price – (the cost of acquisition + house improvement cost + transfer cost).
In the case of long-term capital gain, you will arrive at the gain as:
Capital gain = final sale price – (transfer cost + indexed acquisition cost + house improvement cost).
What is the 2022 capital gains tax rate?
Union Budget 2022 changes the short-term and long-term capital gains tax. You should pay a 10% tax on long-term capital gains if your profit on equity investments is Rs. 1 lakh, and above that, you hold for one year.
In the case of short-term capital gains, your income is taxable at 15%.
How can I avoid capital gains tax on property?
There are many ways you can avoid capital gains tax on property. You can either reinvest your gains or purchase capital gains bonds. Let us know more about them,
Reinvest:
You can reinvest the gain you acquire from selling your property within a time limit. It saves your capital gains tax.
You can reinvest only in a residential property and not a commercial property. You should purchase the new residential property within two years. If you construct a new property, three years is allowed.
The new property should be your second home other than the current house, to avoid capital gains tax. You can’t use this strategy to save on capital gains tax if you own more than one property.
Capital Gains Bonds:
You can invest the gains you acquire from selling your property in Capital Gains Bonds. Capital Gains Bonds also save your capital gains tax. Currently, the National Highway Authority of India and the Rural Electrification Corporation issue these bonds. You can invest up to Rs.50 Lakh in these bonds at the maximum. The rate of interest in these bonds is pretty low at 6%. The chances of these bonds defaulting are almost none as they are government-backed schemes.
Construct Again:
You can get three years by using the sales proceed of the property to build another property.
These are the ways you can avoid capital gains tax on property.
How long do you have to keep the property to avoid capital gains tax?
If you sell your property within three years of your purchase, the gain you acquire comes under your income and is taxable. It is a short-term gain for which the tax rates are high.
On the other hand, if you plan to sell the property after owning it for five years, your returns come under long-term capital gain. Long-term capital gain has less tax compared to the previous one.
So, you should keep your property for a minimum of five years to avoid more capital gains tax.
FAQ: Income tax on sale of property calculator
1. Does capital gains on property count as income?
Capital Gains that you acquire by selling a property come under your income. You are liable to pay income tax for that.
Your income tax rates may vary depending on short-term or long-term capital gains.
2. Do I have to pay capital gains tax immediately?
You don’t need to pay your capital gains tax as soon as you realize your gains. However, you should pay the tax while filing ITR returns for that financial year.
If your selling of property is in a processing state and you did not receive the gains, you need not pay the capital gains tax that year. Once you sell your property completely and get the gain as your income, you are liable to pay tax in that fiscal year.
3. What expenses can reduce capital gains tax on property?
You can reduce your capital gains tax on property, by deducting a few of the expenses involved in the process.
You can claim expenses such as brokerage, stamp duty, sales commission, etc. while filing your Income Tax Return. All these expenses are allowed as deductions only to calculate the Capital Gains.
By deducting these expenses, your total capital gains will reduce and you can save your tax on property.
4. Can you avoid capital gains if you reinvest in real estate?
No, you cannot avoid capital gains by reinvesting in real estate. To avoid capital gains, you need to reinvest your money in any residential property or you should construct your home.
You cannot avoid capital gains by purchasing commercial property or by reinvesting in real estate.
Bottom line
You are liable to pay income tax for the amount you gain from selling your property. This amount is called Capital gain. You cannot avoid income tax on the sale of a property. This capital gain may be short-term or long-term capital gain, depending on the number of years you held the property. Thus, you may be clear about income tax on sale of property calculator.