Wednesday, 31 May 2017

Things To Know About Capital Gains When Selling Property

Reselling is one of the best ways to make a profit. Properties, gold, stocks, etc. are thus are excellent investment options. However, talking particularly about properties, when you sell one at a price higher than what you bought it at originally, you incur a gain, which is technical terms is called a "capital gain". Or, in other words- when you make a profit by selling off a property, it is called a "capital gain". Now, since this type of profit is non-recurring, unlike fixed deposit investments, mutual funds, etc. the taxation is calculated differently for it. There are certain things which you must be aware of if you are going to sell a property. But first things first:
What is a Capital gain?
Any profit that is gained through the selling of properties, bonds, shares, gold, etc. is called a capital gain. It can be of two types- short term and long term capital gain. The amount of time you have held an asset determines whether the gain is a short term one or a long term one.
Short Term Capital Gains
Generally, if you sell off your property within 3 years, then the profit gained is called Short Term Capital Gain(STCG). Here is the gain formula simplified for you:
Short term capital gain = Selling price of the property – (cost of purchase of property + cost of renovations made(if any) + any other expense incurred on the sale or transfer of the property)
Long term Capital Gains
if you sell off your property after owing it for more than 3 years, then the profit gained is called Long Term Capital Gain(LTCG). Here is the gain formula simplified for you:
Long term capital gain = Selling price of the property – (indexed cost of purchase of property + indexed cost of renovations made(if any) + any other expense incurred on the sale or transfer of the property)
Net profit= LTCG- Exemption (if availed) u/s 54 or 54EC or 54F
 What is Indexation?
As you must have noticed, when it comes to long term capital gains, indexation comes into action. The capital gain has to be calculated using indexed prices, rather than the base prices. But what is indexation anyway? Well, indexation is used to calculate the price of your property adjusted for inflation. To understand it better, consider an example. Say, about 10 years ago, you could have bought a cup of coffee for 5 Rs. However, today the price of the same cup of coffee has gone really high. This is due to inflation. With time, the purchasing power of your money reduces. So, when you are selling a property after several years, you have to calculate the price that you would have to pay for the same property today, and not the price you bought it at originally.  
Tax Exemptions on Capital Gains
The government of India provides a variety of tax exemptions that you can claim for the capital gains you make on the selling of your property. Here are some of them that you can consider:
·         As per Section 54 of Income Tax Act you can claim tax exclusion on profit earned if that total profit sum is used for buying another house. To avail this tax exclusion you must either purchase a new home in two years after selling the property, or build a new property within three years after selling.
·         If you are selling an agricultural land that doesn't come within the limits of a civic body then the profit made on it is not taxed
·         You can also avail tax exemption if you are going to invest the capital gain in a small scale or medium scale business. However, you must buy all the tools and machinery that you will need for manufacturing in six months after the sale of the property.
Before you sell any property it is important to learn how capital gains, and associated taxation work. Only then you can make maximum gain, and avail tax benefits. Taking the help of a professional also helps, especially when it comes to calculating accurate prices.

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