Taxation

Tax Implications of Selling a Property

At the present date, a property is priceless. The value of a property can exponentially rise with the development of the nearby area. Property has become one of the most valuable assets. However, there may come a time in your life span when you might have to dispose of or sell your property. The reason for selling a property can be numerous. Some sell their property to relocate elsewhere whereas some sell their property to overcome financial hardships. Various emotions are involved while selling a property. But what demands your attention is that in India, selling a property attracts tax liability. Except for agricultural land, tax is paid on the sale of all kinds of property. To know about the types of taxes applicable at the time of selling of a property, continue reading the blog!

What are the types of taxes paid at the time of selling a property?

1. Capital Gains Tax

The amount received from the sale of a capital asset is considered a capital gain. Capital Gains Tax is paid on the sale of capital assets. And Capital Gain is the difference between the purchase price of the property and the sale price of the property. Immovable properties such as land, building, apartment, individual house, etc are considered capital assets therefore, the sale of capital assets attracts capital gains tax. An exception to capital gains tax is the sale of immovable property. Capital gains tax is of the following two types:

• Long-term Capital Gains (LTCG)

LTCG is the amount realized from the sale of a property after 24 months of buying it. Earlier, it was 36 months but the Budget 2017 reduced it to 24 months. The rate of capital gains tax applicable on LTCG is 20%. The tax imposed is over and above the regular income tax payable by the seller of the property earned through salary or business profit. In the practical sense, LTCG is not just the difference between the purchase price and sale price of the property but is also calculated by factoring inflation cost at the time of sale of the property. To arrive at the purchase price of the property in terms of its current day value, the benefit of indexation is available. Indexation is a formula to arrive at the inflation-adjusted cost price of the purchase. The formula for calculating indexation is:

Indexation = Purchase price x (Index Value of sale year ÷ Index Value of Purchase year).

• Short Term Capital Gain (STCG)

STCG is an amount received from the sale of a property within 24 months of buying it. STCG is the difference between the sale price and the purchase price of the property. In the case of inherited property, the date of purchase of the original owner of the property will be considered. Unlike LTCG, the STCG amount is added to the regular income of the seller and tax is levied as per the income tax slab applicable to the seller.

2. Tax Deducted at Source (TDS)

TDS is the tax that is deducted from the amount payable to the seller. TDS collected is required to be deposited by the buyer to the Income Tax Department. As the amount is deducted from the amount payable by the buyer to the seller, it is not an expense on the part of the buyer. All taxpayers are required to pay TDS on Property irrespective of the state in which the property is situated. As per section 194IA of the Income Tax Act of 1961, the rate of TDS on a property is 1% which is applicable only if the transaction value is more than INR 50 lakh. TDS is deducted at the time of credit of the amount to the account of the buyer or at the time of payment of the sum in cash or at the time of issue of cheque or draft or any other mode, whichever is earlier.

3. Goods and Services Tax (GST)

No GST is required to be paid for selling a property. Even before the GST regime, no tax was levied on sale of the property. Only in case of the sale of property under construction or not fully constructed property or property used for commercial purposes a Service Tax was levied. Similarly, in the present GST regime, the sale of immovable property does not attract GST as it is neither considered a sale of goods or a supply of services under the Goods and Service Tax Act, 2017. An exception to this rule is that GST is levied only in those cases where the property for sale is under construction or not fully constructed property or the property is being used for commercial purposes or along with the property other services such as electricity line, water line, land levelling, etc are provided. This implies that a Service Tax in the form of GST is not applicable if the property is fully constructed or ready to move in or other services are being provides along with the sale of property. In such cases, GST will be charged at the rate of 12 %.

4. Stamp Duty

Stamp duty is levied under section 3 of the Indian Stamp Act of 1899^[1]. It is collected by the government and is required to be paid on time and in full. Any delay in payment of stamp duty will attract a penalty. Where a stamp duty is paid on an instrument or document it gives the instrument or document an evidentiary value and makes the transfer legal and proper. Stamp duty exists for all assets of an immovable nature. Stamp duty is payable at the time of transfer of property and registration of the property with the Government. The rate at which stamp duty is paid differs from state to state and few states also give concession on stamp duty if the new owner of the property is a female.

Wrap Up

If you’re planning to sell your property, you should keep the tax implications in mind. Knowledge of the tax implication on selling a property saves you from losing a large chunk of money and helps you plan your sale according. It is further advisable to finalize the sale and registration of the property in the buyer’s name within two years to avoid any possibility of dispute.

Read our Article: Tax Provisions Relating to Capital Gains