The recovering realty sector has given a spurt to property transactions in recent times. However, many investors are ignorant that some of these transactions attract capital gains tax.
Tax consultants say that “house property” defined under the Income Tax Act consists of any building, flat or shop and the land attached. Thus, the sale of property attracts either short- or long-term capital gains tax.
Short-term capital gains are calculated if immovable property is sold or transferred within three years of its purchase. Suppose if a person buys a house for Rs.10 lakh and sells the house for Rs.15 lakh in the same financial year, the capital gains will be Rs.5 lakh.
The earnings will be included in heads “other incomes.”
The tax will be calculated on the basis of the tax slab for each individual. For the year 2010-11, the tax on income will be 10 per cent for incomes up to Rs.5 lakh; 20 per cent for incomes between Rs.5 lakh and Rs.8 lakh; and 30 per cent for incomes above Rs.8 lakh.
The tax is basically assessed at normal rates applicable to the total income. Brokerage charges are deduced from the amount.
However, there will be no tax on the capital gains if the house is on a notified agriculture land outside the municipal area and 8 km from the city or town. Long-term capital gains are income from selling or transferring property after holding them for more than three years.
This is different in the case of shares, debentures and mutual funds units, where the period of holding is only one year. The long-term capital gains tax has been fixed at 20 per cent plus 3 per cent education cess. If the house is sold for Rs.10 lakh now, the long-term capital gains tax will be charged on Rs.3.68 lakh (Rs.10 lakh – Rs.6.32 lakh), the difference between the amount calculated for 1981 and 2009-10, Mr. Menon says.
There are several exemptions as well. A deduction of Rs.1.6 lakh is given if the person has no other income.
The tax deduction is Rs.2.4 lakh in the case of senior citizens having no other income. No tax has to be paid if the land falls under a notified agricultural area, Mr. Menon says.
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