Part II: De mystifying capital gains
Nov 13, 2013
Source : The Times of India


DELHI: Just as buying real estate is a big decision for investors, so is selling. The profits that one makes in real estate may seem lucrative, however, it brings along liabilities in the form of taxes. Since many end-up paying a large amount as taxes on property selling, a sound knowledge of capital gains and ways to save taxes may help buyers.

Capital Gain as the name suggests is a surplus or profit that arises from transfer of a Capital Asset. The capital assets could be shares, bonds, mutual fund investments or real estate property.

Gains arise only when the amount realised on the disposal of an asset exceeds the cost of purchases of the asset. Alternatively there could be a capital loss, if the amounts received from the sale of a capital asset are less than the purchase price. Although the Income-tax Act, 1961 charges income tax on all income earned by a person in India, there is also a tax on capital gains.

In real estate, there are two types of taxes that the seller of the property is needed to pay. These are Short Term Capital Gains (STCG) and Long Term Capital Gain (LTCG).
The concept of Short term or long term capital gain depends on the holding period of the asset. In most instances Short Term Capital Gain arises when the capital assets is held for a period not more than 36 months. However in case of Shares of listed companies and Units of Mutual Funds the period is restricted to 12 months. In case of real estate, the gains would qualify for long term gains if the property is held for a period of 36 months or more.

The difference between STCG and LTCG is most significant from tax planning point of view. Long term capital gains are charged at a concessional rate of tax i.e. at 20 per cent in most cases and further re-investment benefits are available so that one can reduce the tax liability to zero.

However the income from short term is chargeable at the regular rate of tax as per the slab and no investment benefits are available to reduce the tax liability. Further in case of losses on short term assets, benefit of set-off is not available against the gains from long term assets.

How can you calculate the Capital Gain Tax for the purpose of Real Estate?

In case you sell the property during a period which is less than three years from the date of purchase, then it would become short-term Capital Gain and the same would be to be taxed at the prevailing tax slab applicable to you depending on his/her other income. Besides, the benefit of re-investment or repurchase of new house would also not be available. Therefore keep in mind this very important provision of holding the property for atleast 36 months in order to claim the tax benefits.

For the purpose of arriving at the capital gains, the value as per the Stamp duty purpose is taken for the purpose of working out the capital gains. In other words if the agreement is done at a value which is less than the value as per the stamp duty registration purposes, then the value as per the stamp duty shall be taken as sales consideration in order to arrive at capital gains. This is to bring uniformity in taxation by the central and state governments.

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