Taxation and Legal - Capital Gains Tax For Real Estate

Sections 2, 45 to 55 under Capital Gains:

• Section 2 defines that land or house property held for not more than 36 months is Short Term Capital Gain (STCG). Otherwise, it is Long Term Capital Gain (LTCG).
• Section 48 defines Computation of Capital Gains (STCG) = Consideration - expenses on transfer - cost of acquisition - cost of improvement
  LTCG = Consideration - expenses on transfer - INDEXED cost of acquisition - INDEXED cost of improvement
• Section 50C defines special provisions regarding consideration where consideration received is less than the value adopted by the stamp dity valuation authority, the value adopted by the stamp duty valuation authority shall be taken as the consideration (wef 01/04/2002)
• The tax on capital gain on transfer of house property are as follows:

1. LTCG on transfer of house property is taxed at 20%
2. STCG is added to income from other sources, and a taxpayer pays tax at the rate applicable to him/her.

• Section 54 concerns the sale of residential house and subsequent purchase of another property. The conditions are:

1. the taxpayer must be an individual or HUF
2. the residential house sold must be a long term asset
3. the new residential house must be

• purchased within a period (T-1) to (T+2) years, or
• constructed within a period (T) to (T+3) years

4. It does not matter whether or not

• The house sold was not self-occupied
• The taxpayer owned any other house property when the sale and purchase is done

5. Concession in taxes if the capital gains (on sale of old house) is greater than the cost of the new house, then only such excess capital gain is taxed. But if the capital gain (on sale of old house)     is less than or equal to the cost of the new house, then the entire capital gain is not taxed.
6. If the taxpayer sells the new house within three years of its purchase or construction, then for the purpose of computation of capital gain on the sale of the new house (remember, this becomes a STCG when the CG on the sale on the old house is greater than the cost of the new house), its cost will be taken as nil. If capital gain on sale of old house is less than or equal to the cost of the new house, its cost will be reduced by the amount of capital gain made (and was exempted) on sale of the first house.
7. Capital Gains Account Scheme: The amount of capital gain not utilized for purchase or construction of new house within the same accounting year, but which is earmarked for such purchase of construction, must be deposited in a specified bank account opened under ‘Capital Gains Account Scheme’, and payments in subsequent years must be made from such account.

• Section 54B applies to capital gain on transfer of agricultural land, if proceeds are invested in agricultural land. Its provisions are similar to those of Section 54 above.


• Section 54F concerns the sale of any asset other than residential house and subsequent purchase of another property. The conditions are:

8. the taxpayer must be an individual or HUF
9. the asset sold must not be a residential house (if it is, S54 applies)
10. the asset sold must be a long term asset
11. the new residential house must be

• purchased within a period (T-1) to (T+2) years, or
• constructed within a period (T) to (T+3) years

12. It does not matter if the taxpayer owned any other house property when the sale and purchase is done
13. Concession in taxes if the cost of the new house is NOT less than the net consideration in respect of the old asset, then the entire capital gain is not taxed. But if the cost of the new house is less than the net consideration in respect of the old asset, the proportionate capital gain is not taxed.

• If the taxpayer sells the new house within three years of its purchase or construction, then the amount of capital gain on old asset, which was not taxed, will now (in year of sale of new house) be charged to tax as ‘LTCG’.
• If the taxpayer purchases within two years from the sale of the old asset, or constructs within three years from the sale of the old asset, any residential house other than “the new house”, then the amount of capital gain on old asset which was not taxed will now (in years when such additional house property is purchased) be charged to tax as ‘LTCG’.
• Capital Gains Account Scheme: The amount of capital gain not utilized for purchase or construction of new house within the same accounting year, but which is earmarked for such purchase of construction, must be deposited in a specified bank account opened under ‘Capital Gains Account Scheme’, and payments in subsequent years must be made from such account.