Hi, In this post we will learn How to calculate capital gain the property step bby step.

Capital gain is the revenue generated that results from the selling of a capital asset. The value gained from the selling of a capital asset is known as profits. Depending on the retention time of the capital asset, the capital gain will either be short-term or long-term.

Capital gain is available in which there is a sale transaction; cases such as the inheritance of property may not trigger a capital gain. Examples of capital assets for capital gain include households, properties, buildings, trademarks, patents, automobiles, leasehold rights, jewellery, and machinery.

Capital gains tax on the sale of property

How to calculate capital gain the property

Are you the owner of the property and want to sell it? In the event when you sell the property at a greater price than the price you acquired the property, you will be eligible to pay capital gains tax on the benefit you receive from the selling of property.

For eg, if you purchased a house/land 20 years ago and you want to sell it now, you would hope to see a substantial increase in its purchase value. The difference is called “Capital Gains” on your property and are thus entitled to pay tax on such profits.

Must readHow to calculate capital gain?

The above article will give you a better understanding of how to calculate the capital gain with the basic template.

How to calculate short term capital gain on the property

Short Term Capital Gain on the property is known to be an income generated from the sale of property owned by the owner for less than 2 years. As an investor, you are subjected to pay tax on short-term capital gains on the property according to the relevant marginal income tax slab. Some of the important aspects to know are –

  • You are permitted to modify the sale price for any brokerage that you paid at a property sale.
  • You can exclude any building and home maintenance expenditures accrued during the time of which you kept or possessed the property.
  • Indexing income, i.e. inflation adjustment, is not permitted on a property deal categorized as a short-term capital gain.
  • No exemption or savings shall be provided in respect of short-term capital gain tax u/s 54 i.e. by re-investment of property or through the purchase of capital gains bonds offered by RECL or NHAI.
  • The obligation under Short Term Capital Gains will be considerably greater if you are in the higher income tax slab. It is beneficial if it is sold after 2 years of ownership so that it can move it to the Long Term Capital Gains category.

Here is the basic template-

Sale valuexxx
less:Cost of acquisitionxxx
less:Indexed cost of improvementxxx
less:Expenditure incurred in connection with the transfer/salexxx
Long & Short term capital gainsxxx

Let’s understand with an example –

Mr Mukesh purchased a property for ₹10,00,000 in January 2016 and sold for ₹30,00,000 in January 2018 at a brokerage rate of 0.5% on the sale price. He also spent 3,00,000 on property improvement. Calculate taxable capital gain.

Purchase value – ₹10,00,000

Brokerage at 0.5% – ₹15,000

Property improvement cost – 3,00,000

Sale price – ₹30,00,000

Sale value30,00,000
less:Cost of acquisition10,00,000
less:Cost of improvement3,00,000
less:Expenditure incurred in connection with the transfer/sale (brokerage)15,000
Short term capital gains16,85,000

How to calculate long term capital gain on the property

When you sell the property which has been held by you for longer than 3 years, any benefit resulting from such selling would be called a long-term capital gain. Long-term capital gain is measured by subtracting net revenue and indexed property costs. The advantage of indexation is to balance the impact of inflation on the profits made on the selling of the land in such a manner that the real gains on the property are taxable. This is focused on the logic that perhaps the value of money is gradually decreasing as a result of inflation and, thus, it is unjust to charge the long-term owner of the property on the nominal profits that have accrued to him purely as a result of inflation.

Main points to be remembered:

  • Present LTCG tax rate is 20%.
  • You can change your selling price for any brokerage.
  • You can exclude any building and home maintenance expenses incurred during the time of which you kept or possessed the property. Similarly to the indexing gain applicable to the purchasing price, any household improvement spending can also be balanced in compliance with the Cost Inflation Index released by RBI.
  • You will limit or exclude the LTCG tax by investing in residential properties or purchasing bonds offered by RECL or NHAI.
Sale valuexxx
less:Indexed Cost of acquisitionxxx
less:Indexed cost of improvementxxx
less:Expenditure incurred in connection with the transfer/salexxx
Long & Short term capital gainsxxx

Let’s understand with an example –

Mr Mukesh purchased a property for ₹10,00,000 in January 2013 and sold for ₹30,00,000 in January 2019 at a brokerage rate of 0.5% on the sale price. He also spent 3,00,000 on property improvement. Calculate taxable capital gain.

Purchase value – ₹10,00,000

Brokerage at 0.5% – ₹15,000

Property improvement cost – 3,00,000

Sale price – ₹30,00,000

Cost Inflation Index – given below

Financial yearCII
2013-141000
2019-201150

The method for checking the indexed purchase price of an asset 

= Purchase price X  Cost Inflation Index (CII) of the sales year divided by the CII of the purchase year.

= 10,00,000 x 1150/1000 = 11,50,000

The method for checking the indexed cost of improvement of an asset 

= Improvement price X  Cost Inflation Index (CII) of the sales year divided by the CII of the purchase year.

= 3,00,000 x 1150/1000 = 3,45,000

Sale value30,00,000
less:Indexed Cost of acquisition11,50,000
less:Indexed cost of improvement3,45,000
less:Expenditure incurred in connection with the transfer/sale15,000
Long term capital gains14,90,000

That’s it, this is how you calculate capital gain on the property.