How to Calculate Tax on Capital Gains From Selling a Housing Property?

capital gain tax — (Source: expatsmagazine.org)

Capital assets include investment in products such as mutual funds, real estate, etc., and capital gain is the profit you earn after selling those capital assets. The profit you make is categorised as income, and hence, you are liable to pay tax for that amount in the year in which that transaction of capital assets takes place. Besides, capital gains arising from housing sales can be short-term or long-term.

Are you interested in computing tax on capital gains from selling a housing property? If yes, then continue reading.

Steps to Calculate Capital Gains from Selling a House Property

There are 2 types of capital gain that individuals earn after selling a house property. They are–

1. Short-term Capital Gains

This is applicable when you sell your house within three years from the date of its purchase, the profits arising from selling that house are short-term capital gains. As mentioned earlier, this profit is considered as your income and will be taxed according to the income tax rate slab – 30%, 20%, and 10%.

It is calculated by subtracting the sum of the following expenses from the final selling price of a house:

Cost of house improvement
Cost of transfer
The acquisition cost of the house

The formula is, Short-term capital gain = total value consideration – (cost of improvement + cost of transfer + cost of acquisition).

By using this formula, let's take a look at an example to know how to calculate short-term capital gains from selling a housing property:

Mr. Amar bought a house worth ₹50 lakhs on 27th June 2013. He sold that house for ₹65 lakhs in August 2015. The brokerage cost was ₹70,000, and he spent ₹1.3 lakhs to improve the house. Thus, the calculation of short-term capital gains is as follows:

Step 1: Calculate the Net value of the House

This is done by deducting the commission expenses, brokerage, etc. from the actual selling price of the housing property.

Step 2: Check Other Expenses Related to Housing Property

These will include the expenses incurred for the transfer of the property, acquisition cost, and house improvement costs.

Step 3: Calculate Short-term Capital Gains With the Mentioned Formula

The calculations pertaining to the example is shown in the following table:

Particulars	Value
House's selling price	₹65 lakhs
Deduct – Cost of commission, brokerage, etc.	₹70 thousand
Net consideration	₹64.3 lakhs
Deduct – Cost for improving the house	₹1.3 lakhs
Deduct – Cost of acquisition of the house	₹50 lakhs
STCG or Short-term capital gain	₹13 lakhs

As per the tax slab, this short-term capital gain will be taxed 30% according to the income tax rate slab. This amounts to ₹3.9 lakhs.

2. Long-term Capital Gains

This capital gain is applicable when you sell your house after three years from the date of its purchase. The profits arising from selling that house are categorised under long-term capital gains. The profit attracts a tax rate of 20% considering the indexation factor. However, you can claim tax exemptions, unlike short-term capital gain.

It is calculated by subtracting the sum of the following expenses from the final selling price of a house –

The indexed cost of acquisition
The indexed house improvement expenses
Cost of transfer

Long-term capital gain = total value of the consideration received/accruing – (indexed cost of acquisition + indexed house improvement expenses + cost of transfer)

You can calculate this indexation factor by dividing the Cost Inflation Index of the year you sold the house by the CII of the year you purchased that house. Now, multiply the initial purchasing cost of the house with this indexation factor to obtain the indexed acquisition cost.

Let's understand how to calculate long term capital gain on house property with a simple example using this formula:

Mr Y bought a house worth ₹45 lakhs on 20th January 2010. He sold that house at ₹95 lakhs in August 2015. The brokerage cost was ₹1 lakhs, and the house improvement cost was ₹5 lakhs. Therefore, the calculation for long-term capital gain is as follows:

Step 1: Compute Indexation Factor

The CII of the purchasing year (2010) was 711, and it was 1081 in the selling year (2015) is 1081. Therefore, after dividing 1081 by 711, the indexation factor equals 1.52.

Step 2: Assess the Indexed Cost of Acquisition

Multiply the purchasing price of the house ₹45 lakhs with the indexation factor of 1.52. Then, Indexed Cost of Acquisition = ₹45 lakhs*1.52 = ₹68.4 lakhs

Step 3: Determine the Indexed House Improvement Expenses

Multiply the home improvement expenses of ₹5 lakhs with the indexation factor of 1.52. Therefore the Indexed Home Improvement Expenses = ₹5 lakhs*1.52 = ₹7.6 lakhs

Step 4: Calculate Long-term Capital Gains

The calculation of long-term capital gain is represented through a table:

Particulars	Value
Deduct- Cost of commission, brokerage etc.	₹1 lakhs
Net consideration	₹94 lakhs
Deduct – Indexed house improvement expenses	₹7.6 lakhs
Deduct – Indexed cost of acquisition	₹68. 4 lakhs
Total long-term capital gain	₹18 lakhs
Tax exemption on capital gain applicable under sections - 54G, 54B, 54, 54D, 54ED, 54F, 54EC, (if any)	NA
Net LTCG or long-term capital gain	₹18 lakhs

₹18 lakhs will be taxed according to the tax rate slab, which may equal 20%. The tax on long-term capital gains after selling the housing property amounts to ₹3.6 lakhs.

Tax Rate on the Income Gained from Sale of Assets

Take a look at this table illustrated below summarising the tax rate imposed on the income arising from selling of different types of capital assets:

Type of Asset	Duration of Assets	Applicable Tax Rates (as of December 2021)
Immovable property (for example, house)	Long-term – More than 2 years Short-term – Less than 2 years	Long-term - 20.8% Short-term – taxed according to the income tax rate slab.
Listed shares (valid on shares sold through Indian stock exchanges on which investors pay the security transaction tax)	Long-term – More than 1 year Short-term – Less than 1 year	Long-term - The long-term capital gains up to ₹1 lakh is non-taxable. Amount exceeding this is taxed at 10% without indexation. Short-term – 15.60%
Movable property	Long-term – More than 3 years Short-term – Less than 3 years	Long-term – 20.8% with indexation Short-term – taxed according to the income tax rate slab.
Equity-based mutual funds	Long-term – More than 1 year Short-term – Less than 1 year	Long-term - The long-term capital gains up to ₹1 lakh is non-taxable. Amount exceeding this is taxed at 10% without indexation. Short-term – 15.60%
Debt-based mutual funds	Long-term – More than 3 years Short-term – Less than 3 years	Long-term – 20.8 with indexation Short-term – taxed according to the income tax rate slab.

Moreover, note that the tax rates mentioned above exclude the surcharge of 10% applicable on earnings between ₹50 lakh to ₹1 crore. If the income exceeds ₹1 crore, the surcharge is 15%.

You can claim tax exemption on capital gain from the profit made from selling a residential housing property under section 54 of the ITA. Individuals and HUFs qualify to claim this tax exemption only once on long-term capital gains when they use the profit to purchase another house. You can buy a property within 2 years of selling an old property. Alternatively, you can construct a new house within 3 years of selling an old property. However, capital gains from selling the housing property must not be above ₹2 crores to enjoy this tax benefit.

Moreover, you can also invest your profits earned by selling a capital asset in the Capital Gains Account Scheme to enjoy tax exemption. These are a few ways to enjoy exemption on capital gain.

Thus, keep the pointers mentioned above in mind while calculating tax on capital gains obtained after selling a property.

Besides knowing how to calculate tax on capital gains after selling housing property, and reinvesting that income to the right financial avenues can relieve you from tax liability.

Frequently Asked Questions

✓ What is indexation? Is it applicable for short-term capital gains?

Indexation adjusts acquisition or improvement costs of capital assets against the inflationary price of those assets.

It is applicable only when computing long-term capital gains and not valid on short-term capital gains.

✓ When do you need to pay the tax under capital gains?

It is necessary to pay the required capital gains tax before the quarterly due dates.