5 frequently asked questions on Real Estate CAPITAL GAINS

5 frequently asked questions on Real Estate CAPITAL GAINS

Traditionally in India, there has always been a tendency to invest in physical assets such as gold, metals and real estate. Although there are many secondary investment options such as stocks, bonds, fixed deposits etc., real estate still remains at the top of the list. Many believe they should invest in property as soon as they start earning.

This article will address a few important questions on capital gains from a property (profit which accrues from the sale of a property) and it’s long and short term tax benefits. Investment in real estate is your personal choice and we do not intend to provide any opinion nor any judgment on that matter.

1.What are the capital assets?

Capital asset is a type of asset which is useful for long term typically for more than a year. In real estate terms, capital assets are any kind of property owned by a person.

However, capital assets does not include an agricultural land owned by a person in India in the following location-

• if situated within the municipality where the population does not exceed ten thousand;
• if it’s more than 2 kilometres away from the municipality, where the population ranges between two thousand to one lakh;
• if it’s more than 6 kilometres away from the municipality where the population ranges between one lakh to ten lakhs;
• if it’s more than 8 kilometres away from the municipality where the population is more than ten lakhs

2.What is the mode of acquiring these assets?

In order to acquire these assets, there are mainly the following modes of acquisition:

1. Sale
2. Exchange
3. Relinquishment
4. Lease for a term of not less than 12 years
5. Transfers forming part performance of a contract under The Transfer of Property Act 1882

3.What is the difference between long-term and short-term assets?

Any asset held by a person for less than thirty-six (36) months from the day it was purchased is known as the short-term asset.

Any asset held by a person for more than thirty-six(months) is known as the long-term asset.

In India, this the covered under Centralized Act i.e. the Income Tax Act, 1961 (IT Act) which defines the above.

4.What is the formula to calculate Capital Gain?

Capital Gain = (Sale Consideration minus Acquisition cost) minus Expenses or cost of improvements incurred on the property.

5.What are some tax benefits and its limitations on the Capital Gain?

 1) When you sell a residential house:

A residential house is considered as a long-term asset and the tax exemption on the capital gain is only possible under the below conditions-

• If a person purchased a new asset one year before the sale of his/her property
• If a person purchased a new asset within two years after selling his/her property
• If a person constructed a new residence within three year after selling his/her property

Two important things to keep in mind when you sell a residential house are:

• The exemption on the tax is applicable on the capital gain which is less than or equal to the cost of the new property
• If the capital gain is more than the cost of the new asset, then its difference will have tax deduction

Note: This is covered under Section 54 of the IT Act

 2) When you sell any long-term asset other than a residential house-

When you selling any long-term asset other than a residential house, the tax exemption on the capital gain is possible under the below conditions-

• If a person purchased a new asset one year before the sale of his/her property
• If a person purchased a new asset within two years after selling his/her property
• If a person constructed a new residence within three year after selling his/her property

Two important things to keep in mind when you sell any long-term asset other than a residential house are:

• The exemption on the tax is applicable on the capital gain only on purchase or construction of one house property;
• The capital gain is exempted for being taxed under this provision.

Note: This is covered under Section 54 F of the IT Act

3) When you transfer an agricultural land-

In the case of transfer of an agricultural land, the tax exemption on the capital gain is possible under the below conditions-

Any income earned from the capital gain by transferring agriculture land is exempted to be computed as the Annual Income:

• Where the income is used for buying an agriculture land (exemption under section 54B can be availed);
• Where capital again is received on or after 1st April 2004.

Note: This is covered under Section 10 (37) of the IT Act

4) When you buy an agricultural land-

When you buy an agricultural land, the tax exemption on the capital gain is possible under the below conditions-

• If a person purchased land for agricultural purposes, within a period of two years after selling his/her property
• If the capital gain is less than or equal to the cost of the new property
• If the capital gain is more than the cost of the new asset, then it’s difference will attract tax deduction

Note: This is covered under Section 54B of the IT Act

We hope this article has helped you understand about capital gains in property transactions and it’s benefits/impact on your tax liability. We hope the above information will help you make wise investment decisions.