Real estate transactions attract capital gains tax

Now that the tax filing deadline has been extended to this month end, individuals who have not yet filed could take advantage of it. Salaried employees generally depend upon the Form-16 provided by the employer and file accordingly. This is because it doesn’t include the capital gains or losses made by the employee and these need to be declared while filing. This could arise from selling of property, mutual fund (MF) units, bonds and stocks. 

It’s not the quantum of gain or loss that is to be worried, but the declaration of any amount is mandatory. Capital gains are the gains or profits accrued through a transfer of asset that could be property (real estate plot/flat), gold (physical), debt (bonds/MF) and equity (shares/MF). These gains are classified as short-term and long-term which varies on the holding period of the assets and the type of assets. 

For real estate transactions, the gains made from immovable property i.e. plot or flat within two years of purchase is considered as short-term. Any holding period beyond two years at the time of sale would fall under the long-term capital gains (LTCG). The tax rate for this is 20 per cent and for the short-term it’s as per the individuals tax bracket. Of course, the real estate transactions being opaque and could also be ancestral which could lead to problems in arriving at the purchase price. So, if the asset is brought prior to 1st April 2001, a Fair Market Value (FMV) is assumed and then indexation cost has to be calculated.

However, this is different for gifted or inherited property as the cost of acquisition would be considered on the previous owner and their holding period as duration. And the costs of acquisition for the property like stamp duty, registration fee, brokerage costs and other legal fees could also be added to the indexation. For individuals who would like to reduce the overall tax outflow could choose to reinvest in a residential property or specified infrastructure bonds issued by the government (capital gains bonds) within two years from the sale date and up to a limit of Rs 50 lakh. 

For gold i.e. jewelry or bullion (bars/coins) the capital gains tax is considered on the profits made on the sale irrespective of the way of acquisition i.e. inherited or gifted and purchased. The LTCG is considered if the holding period of three year and above from the purchase date and the tax rate is 20 per cent with indexation. The STCG is as per the individual tax slabs. 

In the instances of bonds, the capital gains are classified on the basis of holding periods where the short-term is considered with holding periods of one year or less while anything over a year fall under LTCG. The taxation for long-term is 10 per cent while that for the short-term is as per the individual tax slabs. This varies for the other debt instrument i.e. debt MF where the holding period for long-term is three years and above. The tax treatment in terms of the quantum is similar to that of the bonds. 

Equity shares and related investments like MF, the taxation is different from the rest. LTCG is considered for holding over one year from the date of purchase and anything less falls under STCG and taxed at 15 per cent. The LTCG is zero or exempt till a tweak in the latest budget happened which removed the exemption under the section 10(38). A new section 112A has been introduced with effect from April 1, 2018 which provides LTCG from equity exceeding Rs 1 lakh per year shall be taxable at the rate of 10 per cent with applicable surcharge and cess without any indexation benefit. Also, there’s a provisioning of grandfathering which keeps prices of equity and MF units of Jan 31, 2018 as the benchmark for calculating the capital gains for instruments purchased before the said date. 

The other provision here is that the losses accrued under the short term could be offset against the other STCG or could be carried forward to future financial years, but the long-term capital losses cannot be carried forward. While disclosing capital gains, salaried class can’t use the ITR1 which otherwise is a norm but have to use ITR2 form. 

K Naresh Kumar - The author is a co-founder of ‘Wealcoity’, a wealth management firm, and could be reached at knk@wealocity.com