Sold your property? Know how capital gains will impact your tax filing

Selling or transferring property? Real estate, be it residential or commercial, falls under the capital asset category. The profits you make from selling these assets, known as capital gains, are subject to either short-term or long-term capital gain taxes. It will impact your wallet depending on how long you hold onto the property, say experts.

Amit Gupta from SAG Infotech explains how capital gains are taxed on shorty term and long term basis.

"For properties held for less than 24 months from the date of acquisition, any gains from the sale are considered short-term capital gains (STCG). STCG can be calculated by deducting the expenditure incurred, cost of acquisition, and cost of improvement from the sale value. The tax on STCG is based on the individual's tax slab," he said.

"On the other hand, properties held for more than 24 months are classified as long-term capital assets (LTCA). The calculation of long-term capital gains (LTCG) involves deducting the expenditure incurred, indexed cost of acquisition, and indexed cost of improvement from the sale value. LTCG is taxed at a rate of 20 per cent with indexation benefits," he added.

Exemptions under section 54 & section 54F

The Indian Income Tax Act introduced Section 54 and Section 54F in order to encourage investment and reduce tax burdens. Under Section 54, individuals and Hindu Undivided Families (HUFs) can claim an exemption from capital gains tax on the sale of a residential property if the gains are reinvested in another residential property within specific time frames. Section 54F provides a similar exemption for gains from the sale of any long-term capital asset, excluding residential property, if the net consideration is reinvested in a residential property.

"To avail these exemptions, certain conditions must be met, including the timeframe for reinvestment and the minimum holding period of the new property. The Budget 2023 has increased the exemption limit for Section 54 and Section 54F to Rs 10 crore, promoting further investment in the real estate sector," Gupta said.

Section 54 exempts capital gains tax on residential property sales through reinvestment | Image credit: Unsplash

These sections stimulate investment and economic growth by offering tax relief and incentives. They drive demand for residential properties, leading to price surges, increased construction activities, and a positive impact on allied services in the real estate sector. Additionally, these provisions empower individuals to save taxes, accelerate wealth building through equity, and protect their assets from inflation.

According to investor and author Robert Kiyosaki, investing in real estate, even on a small scale, is a tried and true means of financial growth. In India, the real estate market has seen decent returns in recent years, with average prices in the top seven cities witnessing an 11 per cent rise in the last five years. The year 2022 saw a significant increase in yearly rise and improved rental yields, making it favourable for real estate investors seeking both capital appreciation and rental yield.