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.
Also Read: Current A to Z Income Tax Provisions for 2016
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.
Also Read: How to save maximum income tax for Rs 10 Lakhs income in India?
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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Suresh
What are the tax liabilities on selling commercial or residential properties
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I SOLD COMMERCIAL PROPERTY FOR RS.1750000 WHICH WAS MY ANCESSTRAL AND CAME IN MY NAME AFTER THE DEATH OF MY MOTHER IN1996.AT THAT TIME THE PROPERTY WAS KEPT AS MORTGAGE FOR RS3500IN 1986.IN YEAR 2005 I TOLD THE MORTGAGEE TO REDEEM IT AFTER TAKING THE REDOMSON MONEY RS 3500 BUT HE DECLINED .I FOUGHT CIVIL SUIT TWICE IN LOWER COURT&TWICE IN SESSION COURT. AFTER WINNING THE CASE IN 2015 ISOLD THE PROPERTY. NOW IAM NOT KNOWING HOW TOCALCULATE LTCG.ISOLD PROPERTYIN OCTOBER 3,2017
Suppose I have commercial property on rent in Sadaar market and i paid always property tax then i would liable for commercial tax or not??
Suppose i am a builder.. I want to sell my one of the constructed property at rs. 50 lakhs.. Cost incurred Rs.46 lakhs.. But the property is owned by my father ..i have also some amount invested in it for constructing house with the basis of verbal agreement about profit sharing . Half of the remaining amount we will use for constructing another one and some amount used for paying debts, loan…no other income to my family… I have one elder sister.. How to avoid maximum tax liabilities
a commercial property bought in 2000, sold in 2018, how to save capital gains tax, can we buy, industrial/residential/agriculture land in exchange to save or what will be the capital gain tax index
I would like to buy residential property from sales of commercial property where depreciation was claimed.
What are the tax implications
i would like to purchase residence by selling out industrial plot . i would have to pay capital gain or not
i want to purchase commercial property by sewlling my house what will be tax liabuilities
I want to purchase a commercial property from the amount received on resale of residential property . . . . What are the tax liability and rules? ? ?
I SOLD COMMERICAL PROPERTY LONG TERM GAIN I CAN INVEST IN 54EC BOND OR NOT WHAT I DO WHAT IS OTHER OPTION…
When I want to sell my 50 years old residential property and want to invest that amount in to Commercial Property. DO I need to pay any tax to the government. This is the case when residential property is 25Lakh and the commercial property will be of 65Lakh. Is it allowed to use the amount earned by selling the residential property to further buy commercial property , whether I have to pay any tax on the amount earned from property in case am investing it in comm. Also explain vice versa case.
my wife purchased a residential property in Noida and taken lone from me. Now she has sold her 20 year old shop in Vadodara and refund my lone will she get benifit of capital gain tax
Hi,
is capital gain applicable on inherited property sale aswell??
If yes, how is calculated and how can we save tax on such sale of property.
the property is a 50+ year old property.
Regards,
Ravi
Suresh
I have paid my entire home loan last year and this year I cannot get the exemption of 1,50,000 for home loan interest. In case if I buy a flat ( second home), shall I declare that this year and get the tax exemption for 1.5 lacs? What are all the tax implications and any other impact on this? Please suggest.
Sir, Does the long term gain by selling mutual funds will have the tax exempt if we purchase a house with in 2 years ?
Thanks a lot sir
Thanks sir for this good information. My query about long term capital gain is that is tax charged against the calculated index cost?If yes,how much it charges?
Hi ASK, Tax is on differential between sale value minus indexed cost (e.g. you sold at Rs 10 Lakhs, but indexed cost is Rs 8 Lakhs, difference is Rs 2 Lakhs is the capital gain). On this capital gain amount, tax is computed. Short term capital gain is 15% and long term capital gain is 20%
Very informative. Continue with your brilliant analysis and enhance our knowledge.
Sir,
Thanks for very informative article, in my case the flat is in my mother’s name, we want to sell that flat and build a house in another piece of land which is in my name, can my mother claim IT benefit since the money received in selling her flat is invested in building a house (but the land is in my name). One more additional question, the rental income from that new house will be included in my taxable income or my mothers taxable income?. Appreciate your expertize opinion.
Hi Kumar, If she has sold property, the re-investment should be done in your mother name only to get tax benefit. Since new property would be in your name, only you would get tax benefit. Best way is to convert the new property as joint property between you and your mother. Your mother re-investing her share to build property. She would get tax benefit. In future rental income can be shown as joint income and you can get tax benefit on rental income of your portion. Your mother need to show rental income in her tax returns (if income is taxable). My advice is to consult tax consultant to get more clarity before proceeding further. You may pay few hundred bugs, but your documentation would be property
Sir, thanks very much for this useful article. It is short and sweet, hitting on important issues which generally people miss to keep in mind. I suggest pl add a little more explanation about what exactly is a short term/ long term capital loss is.
Suresh, Any profits / losses arising out of sales of assets is termed as capital gain or capital loss. For all assets short term is 36 months. For shares, it is 12 months. Means if you have any losses from sale of shares within 12 months, you can set-off such loss from these capital gains from sales of property. Similarly if you have any long term capital losses arising from any other sale of asset for more than 36 months, you can adjust such loss against capital gain from sale of property. This has to be done in the year where actually this loss occurred