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How to Calculate Capital gain on Sale of House?

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December 20th, 2014 by bemoneyaware

What will be the tax implications for me or my  father/mother on selling of house? What is the tax liability on selling house? What is tax liability on selling house if my parents sell the house and  gift the sale proceeds to me? This article tries to answer such questions.

On Selling the House or Property

When you sell your house, you are liable to pay tax . Gains or Loss which arise from the sale of capital assets,such as Gold,  Debt Mutual Fund and Property etc are subject to tax under the Income-tax Act, under the head Capital gains.  The tax paid on this amount of capital gains is called Capital Gains Tax . Conversely, if you make a loss on sale of assets, you incur a Capital Loss This is explained in our article  Basics of Capital Gain

Capital Gains for Real Estate or Property

For Real Estate the computation of capital gains are as follows:

  • If a property is sold within three years of buying it, it is treated as a short-term capital gain.  This is added to the total income and taxed according to the slab rate.
  • If a property is sold after three years from the date of purchase, the profit is treated as a long-term capital gain  and is taxed at 20% after indexation  .
  • If you took property on home loan, claimed the tax deduction for the principal under Section 80C and  property is sold within five years, the tax benefits will be reversed. The entire tax deduction , for repayment of principal component of the home loan , claimed in earlier years under section 80c. will be considered as your income (in addition to capital gains) in the year in which you sell the property. However, the housing loan interest deduction claimed under section 24(b) won’t be reversed.

While you can avail of various tax exemptions in case of

long-term capital gains, no such benefit is provided for short-term ones.

Budget 2014 has introduced

  • An amendment to Section 54EC and from FY 14-15 i.e. AY 15-16 onwards, the investment made by an assessee in the long term specified asset, out of capital gains arising from the transfer of one or more original asset or assets are transferred and in the subsequent financial year does not exceed Rs. 50 Lakhs
  •  An amendment to Section 54F to be effective from FY 2014-14 i.e. AY 15-16 and as per this amendment the exemption is available if the investment is made in 1 residential house situated in India.

Any money spent on improvement by the seller and the previous owner prior to 1 April 1981 will be ignored. For improvement expenses after 1 Apr 1981, the indexed cost as per the relevant financial year will be added to the cost of acquisition

Short Term Capital Gain = Sale Price -

(Cost of Acquisition + Cost of Improvement + Cost of Transfer)

Long Term Capital Gain = Sale Price -

(Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Indexed Cost = Cost incurred *

(CII of the year of transfer)/ (CII of the year of Acquisition or Improvement)

Capital gain on Sale of House and Income Tax Return (ITR)

For salaried person, If you have made capital gains during the year, you need to fill ITR Form 2, as Form 1 is only for income from salary/pension, one house property and other incomes (excluding from lottery). ITR Form 2, is for declaring income from (sources other than the one declared in Form 1) capital gains, all house properties and other sources (including lottery).

From when does one calculate three years on buying the property? Will it be from the date of possession or the date of allotment ?

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