Capital gains tax on land sale 2022

We take a look at how income from sale of property is taxed and the possible ways of avoiding it in the assessment year 2022-23.

When you sell any property and make a profit on it, it is considered a ‘capital gain’ and is liable to what is called a capital gains tax. Before we get into ways of avoiding this tax, let us take a look at what exactly this tax is. Essentially, any asset you own is considered your ‘capital.’

If there comes a time when you have to sell this capital, any profit you make on that sale is considered income from the sale of capital and like all other income becomes liable to income tax. The tax in case of gains made on the sale of capital is called capital gains tax or CGT. But the amount of tax depends on one primary factor.

The holding period or how long you have held the property before you sell it makes the gains you make on the sale fall into the category of long-term capital gains or short-term capital gains.

Long Term Capital Gains Vs Short Term Capital Gains

Depending on the nature of the asset and the period for which it is owned before it is sold off determines whether the asset is considered long-term capital or short-term capital for the purposes of taxation.

As far as property is considered, any property owned for a period of fewer than three years is considered short-term capital. And any property owned for over a period of two years or more is considered long-term capital.

Calculation of Capital Gains

The plain and simple manner in which profit on the sale of any object is by taking the selling price and minus the cost at which it was acquired, also known as the cost of acquisition. As far as property is concerned, the buying price is not just the value the property was purchased for.

There is also stamp duty that is paid on registration of the property and in many cases, even brokerage comes into the picture when the property has been purchased through a real estate agent or agency. And any improvements made to the property that enhance the overall value of the property can also be added to the cost of acquisition while determining the capital gains made on the sale of the property.

So if you have done any repair work or construction work to the property, the cost incurred can help you reduce your capital gain and thereby your tax liability. Keeping track of these expenses is one of the simplest ways of avoiding taxes because, for the purpose of determining the capital gain, they can all be added to the cost of acquisition. The higher the cost of acquisition, the lower the value of the capital gain, and hence the overall tax liability is also reduced.

Now, what is the most important step next is determining whether it falls into the category of short-term capital gains, which attracts short-term capital gains tax, or long-term capital gains, which attracts long-term capital spent year in which the sale has been made. Know more about the Tax on Property Registration as per the new Laws.

Gains made on the sale of any property that has been held by the owner for a period of more than three years are considered long-term capital gains and are liable to long-term capital gains tax which is charged at 20%, plus any cess that is applicable as per the budget of the assessment year in which the sale of the property has taken place.

However, as far as long-term capital gains are considered, there is something called ‘indexation’ that also comes into play that helps enhance the cost of acquisition apart from the cost of improvements. Long-term capital gains also allow you to consider the cost of inflation gains tax. Any gains made on the sale of property that has been held for a period of three years will attract short-term capital gains.

Short-term capital gains made on the sale of property are taxed as regular income. This means the gain will be added to the income from other sources if any, and then charged to income tax as per the slab rate prescribed in the budget of the asseon while deducting the cost of acquisition and improvements from the sale consideration while calculating the capital gains for the purpose of income tax liability.

The word ‘indexation’ itself comes from something called the ‘Cost of Inflation Index’ or CII for short. This is an index of values calculated by the income tax authority every year to mark the increased cost of living during a particular assessment year.

Long-term capital gains are always calculated at ‘indexed cost’ which is arrived at by taking the CII value of the year in which the sale is made and dividing it by the CII value of the year in which the expense for the cost of acquisition is made.

This value is then multiplied into the original cost of acquisition, be it the buying cost or the cost of any improvement, thus enhancing the value of the buying cost and helping in reducing the capital gains by that much. This will then reduce the overall tax liability.

Now there are certainly other ways to avoid this capital gains tax as well. Let’s look into those.

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Exemptions to Capital Gains on Sale of Property As Per the Law

As per the Income Tax Act, if you have purchased any other property within one year prior to the sale of the capital gains from the sale of property, you can use the value of this purchase and add to your total deductions against the consideration of the sale to arrive at your capital gains. So if the value of the purchase is more than the gains you make on the sale, you can gain complete exemption from Land Capital gain. But there is a condition.

This new property has to be held for a period of more than three years. If this property is sold within two years of purchase, the exemption availed on capital gains is reversed and the deduction becomes disallowed. The capital gains become liable to capital gains tax retroactively.

You can also avail an exemption from capital gains tax if the sale proceeds are invested into any other property or construction project within two years of Selling the Property. But for this the condition is applicable. This new property has to be held for at least three years for the exemption on capital gains to be valid.

Conclusion:-

There are many ways to structure your income in a manner so you can avail as many tax benefits as possible. If you are planning on making an investment in a property or considering selling a property you already own, get in touch with us. Our experts will ensure that you receive the best advice possible to make sure that any capital gains you make are structured to ensure your transaction avoids as much taxation as possible.

Also, Read:

• Section 80TTA and Section 80TTB
• Avoid Capital Gains Tax on Stocks