What are the tax liabilities on selling commercial or residential properties?
Many investors invest in real estate properties like commercial properties, residential houses or plots for 10 to 20 years and sell them to either to create retirement wealth or for child education or daughter marriage. However, there could be tax liabilities arising from buying and selling these commercial or residential properties. If you are not aware of them, you may be caught by the Tax Ombudsman and you may need to pay heavy penalties. What are the tax liabilities on selling commercial or residential properties? What are the various ways where you can reduce or avoid tax?
What is commercial property?
If you are familiar, skip this section. Commercial property means any building or land which is intended to create more money through capital gain or through rental income which is located in the heart of the city and classified as “commercial” property by local governments. It includes office building, industrial property, hotels, malls, retail stores, multifamily housing buildings, etc. Commercial properties are business focused and involve property that is sold, leased or used to achieve a business objective.
What are residential property?
If you are familiar, skip this section. A residential property is one where housing predominates and monetary gains are through letting it out for rent for residential purpose. It revolves around the want and needs of the homeowner and his family. It involves property purchased for individual use. In case of plots / open lands, there is zero rental income.
However, from the taxation point of view, both the commercial and the residential property are treated alike. If the sale of both residential and commercial property fetches profit, it can be classified as a long term capital gain or short term capital gain.
How capital gains are classified as short term and long term?
- If you hold the property for more than 3 years, and then sell it off, the profit so arises falls under the category of long term capital gain.
- In case you sell the property before 3 years, then it would be termed as short term capital gain and taxed as per the applicable tax slab.
How does the short term capital gain calculated?
Short Term capital gains arising out of the sale of capital assets shall be computed in the following way:
- Full value of consideration
- Less: cost of acquisition+ cost of improvement+expenditure on sale/ transfer of property+ exemptions (if any).
- Here, the full value of consideration means what the transferor receives or is entitled to receive as consideration for the sale of property. This value may be in cash or kind, i.e. in exchange for an asset.
How does the long term capital gain calculated?
Gains at the time of sale of long-term capital assets shall be computed in the following way:
- Full value of consideration
- Less: (Indexed cost of acquisition + expenditure incurred wholly & exclusively on sale/transfer + indexed cost of improvement + exemptions (if any)
- Indexed cost = actual cost x cost inflation index of the year of sale/cost inflation index of the year of purchase.
Also Read: 10 Awesome ways to save income tax u/s 80C
How capital gains are taxed in India?
- Short term capital gain is added to your gross total income and taxed as per the prevailing tax bracket applicable to the assesses depending on his other incomes and will be filed along with the income tax returns of the assessee.
- Long term capital gain shall be taxed at 20%, computed on the net gain arising from any such transaction. The advance tax shall be liable to be paid on all long term capital gains. The advance tax on long term capital gain shall be paid if the estimated tax liability for the year is more than Rs 10,000. As per the income tax rule 125 the corporate and non corporate (whose accounts are required to be audited) shall pay taxes through electronic payment facility of the authorized banks, while all other tax payers can pay both electronically or by submitting Challan at the receiving bank.
Can we set-off short term capital gains with either short term or long term capital gains of a year?
- At the time of sale of any asset, if a Short term/long-term capital loss arises to a tax payer, this loss is allowed to be set-off in the same year against any short term or long term profit is there.
- If the loss is not set-off in the same year it can be carried forward for 8 years from the end of the year in which loss was incurred.
- But loss can be carried forward to the next year only when the loss is properly disclosed in the income tax return and the return is filed before the due date of filing. This is key.
When should we pay advance tax arising from capital gains?
- The due date of the instalment is on or before 15th June, 15th Sep, 15th Dec and 15th Mar. (15%, 45%, 75% and 100% respectively)
- If income tax is not paid as per the schedule, then interest is liable to be paid for late payment of tax. Interest at 1% per month is payable under Sec 234C if tax is not paid as per the schedule and interest at 1% is payable under Sec 234B if 90% of the tax is not paid before the end of the financial year.
- Form ITR-2 is to be filled with respect of these capital gains.
How to save tax on long term capital gain in India?
- Reinvesting sale proceeds in another residential property within 2 years under Sec. 54 or 54F.
- Investing in capital bonds under Sec. 54EC-NHAI and REC.
- One important point to be noted is that any sale proceeds of property above Rs 30 Lakhs, the copy of the sale deed is sent to the Income Tax department from the sub registrar office. So, if you do not pay the income tax, a notice is issued and at that time, heavy penalty with interest is charged.
Conclusion: People keep on changing the ownership of the properties, but there are a few provisions that have to be kept while selling the property in order to save the income tax liability and also the unpleasant penalties levied by the Income Tax Department.
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What are the tax liabilities on selling commercial or residential properties