Tax advisory services on Property Sale

The value of real estate has risen multi-fold in the past few years due to demand from local as well as NRI buyers. Thus, when a property owner sells a property in today’s market, he/she incurs a high value of Capital Gain Tax on property sale. This is because the person may have bought the property some years ago for a low value. Even in case of investment property, the person will be looking to move out to gain the profits from sale.

At K. M. Gatecha & Co. LLP, the team of experts aim to make the complete process of sale of property, hassle-free, efficient and optimize the tax liability that arises out of these transactions.

Therefore, by availing our services our clients reap the highest profits or returns out of their investments or properties.

There are many aspects that must be considered while taxable capital gain is calculated in Indian residents.

Some of the aspects are:

• Indexation of property:
  • Indexation of property indicates how much the property should be worth if only inflation index is to be taken into consideration.
  • Indexation is calculated as:
    • Cost of purchase of property x CII (cost inflation index) of year of sale/ CII of year of purchase.
  • So, by this method it is determined what is the capital gain on property that an individual or company has sold.
  • So, if property was bought for INR 10,00,000 lakhs in F.Y. 2001-02 and sold in F.Y. 2020-21 then the index cost of house will be:
    • 10, 00,000 x317/100 = 31, 70,000 INR.
  • Indexation can only be taken into consideration in case of long-term capital gain (when property is held by owner for 3 years or more).
• Other expenses taken into consideration when calculating capital gain on property are as follows:
  • Selling expenses:
    • Stamp duty, property registration charges etc.
  • Cost of acquisition:
    • The original cost of property when bought or acquired.
  • Indexation value of property.
• So, calculation of profits would be on the following amount:
  • Short term:
    • Sale value of Property- selling expenses – cost of acquisition.
  • Long term:
    • Sale value of property- selling expenses – indexed cost of property acquisition.
  • Other notable aspects of capital gain:
    • You can avail of “roll over benefits” under section 54 of Income Tax Act if you buy another residential house 1 year prior or up to 3 years after the sale of a residential house. If the cost of new residential house is less than the capital gain from sale, then the difference amount will be taxed as per rate of tax.
    • You can also avail of benefits of reinvestment by investing in certain notified bonds (up to 50 lakhs).
    • If anyone is not able to reinvest the capital gain to avail exemption within the financial year, then amount of capital gain is to be deposited in a nationalized bank under the Capital Gains Accounts Scheme (CAGS) before the due date of filing of Income Tax return for the relevant year.
    • The person who buys the property must deduct tax at source at 20% if the property is held by you for 3 years or more and at 30% if the period is less than 3 years.
    • If the sale price shown is less than the Stamp Duty Value (the value which is determined by the Stamp Duty Authority of India) then the difference amount may be calculated in capital gains on the property.

Aspects to be kept in mind for an U.S. Citizen:

• Sale of property in India is taxable in the United States if you are a U.S. Citizen.
• The capital gains are calculated as selling price- cost of acquisition.
• There are no indexation benefits available to U.S. Citizens in United States.
• If the property was your main home for 2 years within the last 5 years, then $250000 can be deducted from the capital gains. If you and your spouse both used the property as your main home, then $500000 can be deducted from capital gains. There is no such provision if it is less than 2-year period.
• If the above condition is not satisfied, then the property is classified as second home and the capital gains will be taxed as follows:
  • If held for more than 1 year, then classified as long-term capital gain and taxed at the rate of 15%.
  • If the period is less than 1 year, then it is taxed at normal rates applicable.
• An U.S. person may avail of the reinvestment benefits provided in India, but he may still be taxed in the U.S.