Dubai: As a non-resident Indian, many of us might have bought or inherited property and want to sell it. How does taxation work in this case? A tricky scenario that flummoxes many. But, worry not, for we have a detailed explainer to help you understand the many layers to the process of capital gains tax on property.
1) Broad framework - capital gains tax
Capital gain refers to the profit arising from the sale of a ‘capital asset’. Capital assets include any kind of property held by a taxpayer, whether or not connected with his business or profession.
Though certain assets such as goods for personal use, trading stock, stock inventory etc. are not capital assets, the goods for personal use shall exclude personal jewellery, paintings, antiques, etc.
Thus, jewellery will be stock inventory for a jeweller but will be a capital asset for an individual.
2) Is house property, including inherited house property, a capital asset?
House property owned by an individual is considered as a capital asset for tax purposes. Any house property inherited by an individual through will, succession or gift is also considered as a capital asset.
Capital gain will be applicable if the person inheriting the house property subsequently sells the property for a price
Capital gain is not applicable at the time of receiving a house property by way of inheritance. However, capital gain will be applicable if the person inheriting the house property subsequently sells the property for a price.
3) Is land property, especially agricultural land, a capital asset?
For a land to be classified as agricultural, two conditions have to be fulfilled:-
a. It should have been put to agricultural use prior to transfer
b. It should be outside the jurisdiction of a municipal corporation having less than specified population, and also outside specified distances from municipal boundaries having specified population.
All lands other than agricultural lands are capital assets.
4) Determine the period of ownership of the house property
The house property should be classified into either of the following two categories:
a) Short Term Capital Asset
b) Long Term Capital Asset
If the house property is held for a period of 24 months or less, then the property is classified as ‘short term capital asset’.
On the other hand, if the house property is held for more than 24 months, then the property is classified as ‘long term capital asset’.
For the house property acquired by inheritance, the aggregate period of holding by the current owner and by the previous owner is considered to determine the above classification.
5) Calculation of capital gains
Depending of the categorisation of the house property as Short Term Capital Asset or as Long Term Capital Asset, the capital gain is calculated as per the defined procedures.
6) Calculation of Short Term Capital Gains (STCG)
If the house property was held for a period of 24 months or less:
Step 1 - Determine the full value of sale price/consideration i.e. the price received or to be received by the seller.
Step 2 – Deduct expenditure incurred wholly and directly in relation to the sale of the property including brokerage, cost of stamp papers, expenditure relating to inheritance, etc.
Step 3 – Deduct the cost of acquisition/purchase cost of the house property.
Step 4 – Deduct the cost of improvement i.e. capital expenses for making any additions or alterations to the house property.
If the house property is acquired by way of inheritance, the cost of acquisition and cost of improvement by the previous owner should also be deducted.
The resultant amount is referred to as ‘Short Term Capital Gain (STCG)’. STCG is added to the total taxable income of the seller, and the tax will be calculated according to the income tax slabs applicable to the individual.
No special deduction is available from STCG even if the STCG amount is reinvested in a new house property or bonds.
7) Calculation of Long Term Capital Gains (LTCG)
If the house property was held for a period of more than 24 months:
Step 1 - Determine the full value of sale price/consideration i.e. the price received or to be received by the seller.
Step 2 - Deduct the expenditure incurred wholly and directly in relation to the sale or transfer of the capital asset including brokerage, cost of stamp papers, expenditure relating to inheritance etc.
Step 3 - Deduct the ‘indexed’ cost of acquisition/purchase cost of the house property. If the property was purchased before 1st April, 2001, fair value/circle rate of property as on 1st April, 2001 will be indexed.
Step 4 - Deduct the ‘indexed’ cost of improvement i.e. capital expenses for making any additions or alterations to the house property on or after April 1, 2001
If the house property is acquired by way of inheritance, the ‘indexed’ cost of acquisition and cost of improvement by the previous owner should also be deducted.
8) ‘Indexation’ of costs for Long Term Capital Gains (LTCG)
‘Indexation’ of the cost of improvement and the cost of acquisition is done to adjust for inflation over the years of holding of the house property. Indexation is calculated on the basis of Cost Inflation Index (CII) announced by the government for each year.
For example, for a house property purchased for Rs5,000,000 in March 2009 and sold in October 2019, the indexed cost of acquisition will be as follows:
The ‘indexed’ cost of acquisition of the house property will be Rs10,547,445.26. Therefore, the indexation results in increasing the costs of the property and accordingly, a reduction in capital gains.
9) Deductions from Long Term Capital Gains (LTCG)
In case of LTCG, sale of residential house (not land plot) also allows the seller the benefit of lower or nil capital gain, if a part or whole of LTCG amount is invested in a house property or specified bonds.
Option 1 – investment into a house property
Two types of benefits are available
a. Regular scheme: Investment of long term capital gain from sale of old residential house in one residential house in India.
b. One time scheme: Investment of LTCG amount from sale of old residential house (if below Rs20,000,000) in two residential houses in India. This scheme can be availed only once in a lifetime.
Calculation of benefit
One important aspect to remember is that the investment in the new house property should not be sold for 36 months from the date of purchase/construction.
Further, the new property should be purchased one year before or two years after the date of sale of old property.
Option 2 – investment into specified bonds
The LTCG amount on the sale of the first property can be invested into specified bonds to the extent of Rs5,000,0000. The investment must be made within six months from the date of sale.
The seller can benefit under both options. Continuing with our previous table:-
Until the above investments are made, the seller has an option to deposit the LTCG amount with banks as per the Capital Gains Account Scheme, 1988. However, if the above investment is not made within the prescribed time period, the deposit will be taxed as STCG on the expiry of prescribed time period.
10) Taxation of Long Term Capital Gains (LTCG)
Subject to above deductions, LTCG is taxable at 20 per cent rate along with additional applicable surcharge and cess or ‘education and health tax over and above the tax amount.
Allowable benefit u/s 54’ means the eligible amount of deduction (u/s refers to ‘under section’).
Pankaj S. Jain, is the Managing Director of AskPankaj Tax Consultants and Tax Agency
