Taxation of your Real Estate Capital Gains

If you are in habit of investing in capital assets like stocks, real estate, etc., you will know how the government taxes your profits. But there are many people who in spite of having invested in real estate for years are not very sure about how their profits are taxed. This article tries to explore the taxation aspect of your real estate capital gains (or losses).

When you sell your house or property, you generally would make some profits. Isn’t it? Or else, why will you sell it in first place (let’s leave the case of emergency requirements).

Now depending on your holding period of the property, your profits or capital gains are of two types:

• If the gain is made on sale of property that was in possession for less than 3 years, then it is termed as short-term capital gain (STCG).
• If the gain is made on sale of property that was in possession for more than 3 years, then it is termed as long-term capital gain (LTCG).

Now both these gains are taxed differently.

For taxation purposes, the Short-term capital gains are added to seller’s total income from all sources and taxed according to his/her tax slab.

On the other hand, the seller has to pay 20% tax on long-term capital gains but after adjusting the cost price for inflation (i.e. indexation benefits are available in case of LTCG).

That is not all. If you want to further reduce your long-term capital gains tax, you can do so if you reinvest the profits in another real estate within 2 years of selling the property or in construction of any residential property within 3 years of selling. However it’s quite possible that construction or purchase of a new house might take some time. So if you fail to invest the sale proceeds before filing your tax return for the relevant financial year, you can still avail the deduction of tax by putting your sale proceeds in the Capital Gains Account

Scheme. There is also the option of investing in capital gain bonds issued by PSUs from time to time.

This is just a broad outline of how the gains arising from sale of property are taxed in India.