Many Indians purchase property as an investment in addition to for living quarters. The value of the property rises with time; sold, the profit is known as a capital gain. This profit, though, is not entirely yours; some of it may be taxed. Understanding capital gains on investment property is crucial because of this reason.
What is a property used for investment?
Any property purchased with the intention of generating returns—either from resale or rent—is known as investment property. It could be:
- Two houses or a flat
- Commercial area
- A piece of land
Should the property not be your primary residence, it is regarded as an investment.
Definition of capital gains
A capital gain is what results when you sell your investment property for more than you paid for it. Two versions exist:
- STCG, or short-term capital gains: Should you sell the house two years following purchase,
- Long-term capital gains (LTCG) would be obtained should you sell the house two years later.
How long you owned the property before selling it affects your understanding of capital gains on investment property.
Capital Gains Taxes
Capital gains on investment property in India are taxable in the following manner:
- STCG, or short-term capital gains: Should the property be sold two years from now
- The benefit is included in your overall salary.
- Paid according to your income tax slab.
- The benefit is included in your overall salary.
- Long-Term Capital Gains (LTCG) should be considered should the house be sold two years later.
- Paid at a flat twenty percent.
- Indexation benefit—that is, inflation-adjusting the purchase price—allows you to adjust for inflation. This indexation lowers your tax payability.
- Paid at a flat twenty percent.
An illustration
Imagine paying ₹40 lakhs for a flat in 2018 then selling it for ₹80 lakhs in 2024. Given the holding period—more than two years—this represents a long-term capital gain.
Indexation helps the purchase cost to become ₹50 lakhs (an example value).
- Capital Gain = ₹80 lakhs – ₹50 lakhs = ₹30 lakhs
- Tax = twenty percent of ₹30 lakhs = ₹6 lakhs
Methods of Capital Gain Tax Saving
Legal methods exist for tax savings if you are selling investment property:
- Section 54EC: Bonds Invest in
- Capital gain bonds (like REC or NHAI) let you invest up to ₹50 lakhs.
- These bonds lock for five years.
- The capital gains go free from taxes.
- Capital gain bonds (like REC or NHAI) let you invest up to ₹50 lakhs.
- Section 54F: Purchase Still Another Property
- Should you purchase another residential property using the full sale amount, you can get complete LTCG exemption.
- At the time, you shouldn’t have more than one other house.
- Should you purchase another residential property using the full sale amount, you can get complete LTCG exemption.
- Reinvest in Agricultural Land
- Under some circumstances, reinvesting in agricultural land could also help to save taxes (with specific requirements).
- Under some circumstances, reinvesting in agricultural land could also help to save taxes (with specific requirements).
Notes to Remember
Always remember these things when figuring out capital gains on investment property:
- First sale and purchase agreements
- If any, proof of improvement expenses
- Stamp duty cost and registration expenses
- Indexation table (accessible on Income Tax website)
Final Notes
Though great returns are possible with property investment, remember the tax component. Knowing how capital gains on investment property are taxed improves your planning. With the correct actions, you might even legally save a good portion of your taxes.
Therefore, before deciding whether to sell your house or business property, do a quick capital gains check or see a tax advisor.