What is a ‘capital gain’ when it comes to real estate and what are the tax implications of long-term capital gains for a property owner?
The Indian government requires its citizens to calculate their capital gains separately since income tax needs to be paid on them, especially they are lump sum amount, which is the case in real estate. The Indian taxing system has made it mandatory since 2008 to report all capital gains. The tax rates are generally the same as the regular income bracket. Yes, as of 2016, the best example of capitalism’s insanity in real estate has been seen in the latest Christian Bale movie, ‘Big Short’. Things are actually no different in India. People do make a lot of money through real estate. However, everything needs to be reported and will be taxed on, unless you take measures to save your tax.
What is Capital Gain on Real Estate?
If you invest in equities and you sell those shares you are taxed on the amount that you gained from each share. The gain is generally calculated as the difference between the price of the share you bought it at and the price of the share when you are selling it. In other ways, you have made an income out of it. Likewise, when it comes to real estate there is a difference in price when you made an investment and then your selling price. This is difference is known as the capital gain in real estate.
However, this amount is taxable just as the difference of a share being bought and sold amount is, by the Indian Government. but if you have made losses in the transaction whether it is equity or real estate, the amount is not table. Equities and real estate obviously are considered long term capital gains since their holding period is generally over 3 years or more. Especially in the case of real estate, holding period makes them specifically long term capital gain.
How to calculate Capital Gain on Real Estate Investments?
let us first calculate the capital gains made on on your real estate investment.
- Note down the purchase price of your real estate investment. Let us take it as a simple number say, Rs. 100. You have bought it 5 years, back and at the moment you are selling it at Rs. 200. So, your capital gain basis is on Rs. 100.
- You then have to also add other costs such as fees or taxes that you paid to acquire the real estate property.
- You need to further add to the original buying price, any sorts of improvements or additional investments such as security systems or resources, etc you made to the real estate or even the costs you had to incur pertaining to this property.All such cost that you had not subtracted from the Rs. 100 may add up to Rs. 30 and will be referred to, as the cost of the real estate a.k.a capital additions.
- Subtract this amount, i.e. Rs. 30 from the original purchase price and also the depreciation or even the amortization costs that you had to bear since the date when you made the real estate acquisition. This is generally applicable in the case if the real estate has been rented out. So, the remainder which lets say, is around Rs. 60, is what is your capital gain.
How to calculate the Tax Payable on Capital Gain From Real Estate?
The gains from real estate is included in the investor’s income and hence taxed based on the income slab that the investor falls under. Here is how you actually calculate the tax on the taxable amount of the capital gain you are expected to make:
- Calculate an estimate of the selling price of your real estate.
- Now you would need to conduct through multiplication your marginal long term capital gain rate with the capital gain under circumstances that you have been holding the real estate property for over a year. For example in 2010, the long-term capital gains rate for investors was 15 percent in the ordinary income tax bracket it was 0 percent. This signifies that no tax would have been due in that year. For people whose bracket was in the 25% slab or more than the regular income tax bracket, the long-term capital gains tax rate will be applied at the rate of 15%
- Multiply the capital gain by your ordinary income tax marginal rate in the case that the holding period was only for a year or lower. In such as case, there is no long-term capital gain tax rates that are applicable.
How to Save on Tax on Capital Gains from Real Estate?
There are several spots in the system which allow you to make savings on capital gain tax easily.Here are some of the ways it can be done:
- When you sell a real estate property post 3 years, the tax calculation includes a atter of indexation. The purchasing or acquisition price of the real estate asset is actually recalculated based on this indexation, which considers factors such as inflation for its calculation with the use of the Cost Inflation Index. The advantage here is that the tax on a long term capital gain may be only taxed only at a lower rate after indexation. This helps to reduce the amount of tax payable considerably against the short-term capital gain tax.
- There are also tax saving instruments such as capital gain bonds. The gain that one makes from the sale of the real estate can be hence invested. They generally have a lock-in period of around 3 years. Also, the maximum limit for an individual to invest in these bonds is up to Rs 50 lakhs.
- Often a real estate asset does get identifies and is purchased prior the return for the same has been filed or in the case the due date for filing the tax return, any one of them comes earlier. In such cases the money requires to be deposited in an exclusive account referred to as the Capital Gain Account Scheme (CGAS). This also helps save tax.
- The Income Tax Act in India has provisions for tax exemption of capital gains from the selling price amount of a real estate such as a house in case the taxpayer has makes the gains investment in some other residential property within a period of two years since the selling date of the house or even constructs another house within a time period of three years from the selling date.
People also avoid paying tax on the sale of the real estate property through other means as well. Although not advisable, people in India have the tendency of selling the real estate undervalued rate to a familiar person or in pieces to avoid the the tax aspect. But remember that these transactions are considered sources of black money. It is advisable to do it the right way, so that one does not land up in trouble with law or worse, their conscience.