When selling property in India, sellers must account for various taxes including capital gains tax, cess, and TDS. These taxes must be calculated and paid within the same financial year as the sale.
To fully understand the tax implications of selling property, sellers need to consider several factors that can significantly impact the taxes they owe. Understanding these factors may also help the seller save on taxes.
Types of Gains for Tax on Property Sale in India:
The profit made from selling property is classified as “Capital Gains” and is subject to tax. There are two types of capital gains tax based on how long the property has been held:
Short-Term Capital Gains (STCG):
Short-term capital gains apply when the property is sold within two years of purchase, regardless of whether it is a new or old property.
- Calculation: Sale price – (cost of buying + home expenses + sale transfer costs)
- Tax Rate: Taxed according to income tax slabs (0%, 10%, 20%, or 30%).
Long-Term Capital Gains (LTCG):
If the property is held for more than two years, the gains are classified as long-term capital gains.
- Calculation: Sale price – (indexed cost of buying + indexed expenses + sale transfer costs)
- Indexed Cost: The indexed cost is determined using the inflation index, calculated by dividing the sale year’s index by the purchase year’s index.
- Tax Rate: A flat 20% base rate, with an additional 3% cess.
How to Save on Tax on Property Sale in India:
There are several government provisions that allow sellers to reduce their tax liability when selling property. Some of these are:
- Section 54: Exemption by purchasing another house within one or two years of selling the property, or by constructing a house, which should be completed within three years of the sale.
- Section 54EC: Exemption on capital gains if reinvested in specified bonds. These bonds must be held for at least three years to avail the exemption, otherwise, tax must be paid.
- Capital Gain Account Scheme: The seller can deposit the capital gain in this account, and the amount will not be taxed, provided reinvestment is made within three years. This scheme helps defer tax liability rather than offering tax savings.
- Offset Other Capital Losses: Losses incurred from the sale of other properties can be used to offset capital gains tax on the sale of a property.
TDS on Property Sale in India:
TDS (Tax Deducted at Source) is applicable when selling property for over INR 50,00,000.
- TDS Rate: The buyer must deduct 1% TDS on the total sale value if the property is sold for over INR 50,00,000, and the payment must be made to the Income Tax Department under FORM 26QB.
- PAN Requirements: If the seller does not provide a PAN card, the TDS rate increases to 20%.
- Installments: For installment payments, TDS is to be deducted on each installment separately.
- TDS Payment Deadline: TDS must be deposited within 30 days of the month in which it was deducted.
- Form 16B: After paying the TDS, the buyer must issue Form 16B to the seller as proof of the payment.
- No TAN Required: The buyer does not need a TAN number to deduct or pay TDS; this can be processed using the seller’s PAN number.
Understanding these key factors and provisions can help property sellers manage their tax liabilities effectively and make the most of available exemptions and benefits.
