Capital Gains on Sale of Property: Complete Compliance Guide

Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.

Meaning of Capital Asset Capital asset is defined to include:

1. Property of any kind, held by an assessee, whether or not connected with his business or profession;

2. Any securities held by a FII which has invested in such securities in accordance with the SEBI Regulations;

3. Any securities held by a Category I or Category II AIF which has invested in such securities in accordance with the SEBI or IFSC Regulations;

4. Any unit linked insurance policy to which exemption under Section 10(10D) does not apply.

Short term capital Asset— Any capital asset held by the taxpayer for a period of not more than 24 months immediately preceding the date of its transfer will be treated as short-term capital asset.

Long term Capital Asset— Any capital asset held by the taxpayer for a period of more than 24 months immediately preceding the date of its transfer will be treated as long-term capital asset.

Note: The period of holding shall be considered as 36 months instead of 24 months in case transfer of capital asset takes place before 23-07-2024.

Capital Gains on Sale of Property

Meaning of short-term capital gain and long-term capital gain— Gain arising on transfer of short-term capital asset is termed as short-term capital gain and gain arising on transfer of long-term capital asset is termed as long-term capital gain.

Suppose, In April, 2024 Mr. “R” sold his residential house property which was purchased in May, 2003. Capital gain on such sale amounted to Rs. 8,40,000. In this case the house property is a long-term capital asset and, hence, gain of Rs. 8,40,000 will be charged to tax as long-term capital gain.

And, if Mr. “R” also sold his residential house property which was purchased in May, 2022. Capital gain on such sale amounted to Rs. 4,50,000. In this case the house property is a short-term capital asset and, hence, gain of Rs. 4,50,000 will be charged to tax as short-term capital gain.

Tax rate on long-term capital gain— 12.5%

The long-term capital gain is chargeable to tax at the rate of 12.5%.

Tax rate on short term capital gain—Normal slab rate of tax which is determined on the basis of the total taxable income of the taxpayer.

Computation of long-term capital gains

Important points—

• The benefit of indexation shall not be available to the assessee while computing the amount of long-term capital gain.

• The Finance (No. 2) Act, 2024 has provided a uniform tax rate of 12.5% on long-term capital gain arising from transfer of any capital asset on or after 23-07-2024. Where the long-term capital asset is transferred on or before 22-07-2024, the long-term capital gain shall be taxable at the rate of 20%.

• The Finance (No. 2) Act, 2024 has provided that no indexation benefit shall be available in respect of the long-term capital assets transferred on or after 23-07-2024. However, a grandfathering is allowed for land or building in case of resident individual/HUF.

• As per grandfathering provisions, if the amount of tax under the new law (i.e., the law as amended by the Finance (No. 2) Act, 2024) exceeds the amount of tax under the old law (i.e., the law as it stood immediately before the amendment by the Finance (No. 2) Act, 2024), the excess amount shall be ignored. However, this grandfathering provision applies only to resident individuals or Hindu Undivided Families (HUFs) and only for land or buildings acquired before July 23, 2024.

Example— Mr. “R” purchased a piece of land in May, 2006 for Rs. 84,000 and sold the same in August, 2024 for Rs. 10,10,000 (brokerage Rs. 10,000). What will be the taxable capital gain in the hands of Mr. “R”?

In the instant case, the capital asset is transferred after 23-07-2024, Mr. “R” has option to compute the capital gains as per both provisions [old and new as amended by the Finance (No. 2) Act, 2024]

Computation of Long term capital Gains as per the old provisions:

The cost inflation index notified for the year 2006-07 is 122 and for the year 2024-25 is 363. Hence, the indexed cost of acquisition, i.e., the inflated cost of acquisition will be computed as follows:

Cost of acquisition × Cost inflation index of the year of transfer of capital asset/ Cost inflation index of the year of acquisition

Rs. 84,000 × 363/122 = Rs. 2,49,934

Computation as per the new amended provision

Now, Mr. “R” has option to pay tax at the rate of

• 20% on Rs. 7,50,066 (i.e. 1,50,013/-) or

• 12.5% on Rs. 9,16,000 (i.e. 1,14,500/-)

Since, the amount of Rs. 1,14,500/- is lesser, it is advisable for taxpayer to compute the liability under new amended provision which is without indexation benefit.

Adjustment of LTCG against the basic exemption limit & deductions

1. Only a resident individual/HUF can adjust the exemption limit against LTCG. Thus, a non-resident individual and non-resident HUF cannot adjust the exemption limit against LTCG.

2. A resident individual can adjust the LTCG but such adjustment is possible only after making adjustment of other income. In other words, first income other than LTCG is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against LTCG.

3. No deduction under sections 80C to 80U is allowed from long-term capital gains.

Exemptions from Capital Gains

The Income-tax Act allows exemption from capital gains tax if the amount of capital gains or sale consideration, as the case may be, is further invested in specified new assets. These exemptions are provided as per the following sections:

(a) Section 54: Exemption from the capital gains arising from the transfer of residential house property and investment in new house property.

(b) Section 54B: Exemption from the capital gains arising from transferring land used for agricultural purposes and investing in new agricultural land.

(c) Section 54D: Exemption from the capital gains arising from the compulsory acquisition of land and building, forming part of the industrial undertaking and investing in land or building for setting up or shifting of the industrial undertaking.

(d) Section 54EC: Exemption from the capital gains arising from the transfer of land or building or both and investing in specified bonds

(e) Section 54EE: Exemption from the capital gains arising from the transfer of any long term capital asset and investing in specified assets

(f) Section 54F: Exemption from the capital gains arising from the transfer of a long-term capital asset other than a house property and investing in a residential house property

(g) Section 54G: Exemption from the capital gains arising from the transfer of assets on shifting of industrial undertaking from the urban area to a non-urban area

(h) Section 54GA: Exemption from the capital gains arising from the transfer of assets on shifting of industrial undertaking from the urban area to any SEZ

(i) Section 54GB: Exemption from the capital gains arising from the transfer of residential property and investing in eligible companies or eligible start-ups.