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Tax on sale of property made really simple

Sale of property generally results in a profit and occasionally in a loss. While the gains are liable for payment of tax, the losses are eligible for a set-off.

So here's a short and simple discussion on the tax implications that may arise when you sell any property owned by you.



1. Property held for 3 years or less (classified as a short term asset)
a) Gain
Profit on sale of any property, held for 3 years or less from the date of purchase, is termed as short-term capital gains. It is calculated as under:

Short term capital gains = Sale price - (Purchase price + cost of improvements + transfer expenses)

There are no tax benefits on such short-capital capital gains. Entire profit has to be added to your total income for the year and taxed as per your income tax slab rate.

b) Loss
But, if the above calculation results in a loss, it is termed as short-term capital loss.

You can set-off this loss against long-term and/or short-term capital gains during the year and reduce your total tax liability.

However, if the capital gains during the year are less than the said loss, you can carry forward the unadjusted portion of the loss. This carried forward loss can be set-off against future capital gains for upto 8 financial years.


tax-on-sale-of-property
Short and simple discussion on the tax implications when you sell a property.

2. Property held for more than 3 years (classified as a long term asset)
a) Gain
If you make a profit on sale of any property held for more than 3 years from the date of purchase, it is termed as long-term capital gains. It is calculated as under:

Long term capital gains = Sale price - (Indexed Purchase price + indexed cost of improvements + transfer expenses)
[wherein indexed purchase price  = purchase price * (cost inflation index in the year of sale / cost inflation index in the year of purchase)]
(Note : You can similarly calculate the indexed cost of improvements based on the year of improvements)

In other words, you don't have to pay tax on the gains that accrue due to inflation. Only the real gains are taxable.

Now, you have two options... either you pay tax or save it.

Option A : Pay tax
- Tax payable is @20% of the long-term capital gains.

Option B : Save tax
Again you have two options to save tax...

Option B.1.
By investing the gains in a house property. If you buy one, it has to be done within a band of 3 years starting from 1 year prior to and upto 2 years after the date of sale. If you construct one, it has to be done within 3 years from the date of sale.

Option B.2.
By investing the gains in the specified Sec 54EC bonds issued by REC (Rural Electrification Corporation) or NHAI (National Highway Authority of India). However, unlike unlimited investment in another property, there is a limit here. Only upto Rs.50 lakhs of gains can be invested in such bonds. The balance gain, if any, is taxable. This investment has to be done within a period of six month from the date of sale.

b) Loss
Loss arising out of above calculation becomes your long-term capital loss.

You can set-off this loss only against long-term capital gains during the year and reduce your total tax liability.

However, if the capital gains during the year are less than the said loss, you can carry forward the unadjusted portion of the loss. This carried forward loss can be set-off against future long-term capital gains for upto 8 financial years.

This, in a nutshell, is the tax liability or benefit available to you when you sell your property.


By the way, the buyer to deduct TDS on property sale consideration (subject to specified conditions) and pay you only the balance amount.

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