Did you know that the real estate sector contributes 7.3% to India’s GDP and is expected to reach US$ 5.8 trillion by 2047, contributing 15.5%? This growth highlights the increasing value of property ownership and transactions in India.
With real estate being a popular investment avenue, buying and selling properties has become a common practice among individuals and investors alike.
However, property sales are not just about finding a buyer and completing the deal—they come with various tax obligations. Ignoring these tax implications can result in financial surprises, including penalties and lower net returns.
Selling a property in India is not merely a transaction; it involves multiple layers of tax compliance. Whether you are a resident or non-resident Indian (NRI), understanding the tax implications is crucial to ensure you comply with the law and maximize your gains.
This blog explains the types of taxes, specific regulations, and key considerations every seller must be aware of.
Importance of Understanding the Tax Implications Before Selling a Property
Understanding the tax obligations before you sell a property ensures you are not caught off guard. Taxes on property transactions are governed by India’s Income Tax Act and other laws, and these can differ based on the nature of the property, ownership period, and the seller’s residency status.
Being informed about these taxes helps in:
- Avoiding unnecessary penalties and interest charges.
- Calculating your capital gains accurately to plan reinvestments or tax savings.
- Making the sale process smoother and more efficient.
By proactively understanding the implications, sellers can mitigate financial risks while adhering to legal requirements.
Comprehending these tax implications ensures that the transaction is legally compliant and financially beneficial, especially if you are planning to sell property in Bangalore. With proper preparation and awareness of tax guidelines, you can maximize your gains while minimizing liabilities.
All About Tax Implications on Selling a Property
While selling your property, understanding essentials about taxes tops the list of the Property Selling Checklist.
Tax on Selling Property in India varies depending on factors like property type, duration of ownership, and the buyer’s and seller’s residency status. To evaluate their net profit, sellers must also account for capital gains tax, TDS (Tax Deducted at Source), and other transactional taxes.
Let’s explore the key components involved in selling property and their respective tax implications.
Types of Taxes on Selling Property in India
Capital Gains Tax
Immovable property, encompassing land, buildings, apartments, and individual houses, constitutes a category of capital assets for the purposes of income tax calculations. Consequently, the proceeds derived from the sale of such property are classified as capital gains and are, therefore, subject to Capital Gains Tax.
It is important to note that tax on selling property in India does not typically extend to agricultural land.
Capital gain tax is further divided into two categories:
Short-Term Capital Gains (STCG) Tax
Any profit is treated as short-term capital gains if you sell a property within 24 months of its acquisition. STCG is added to your total income and taxed as per your income tax slab rate.
Suppose you purchased a 1 BHK flat in April 2019 for Rs. 25 lakhs. If you later sold this property in November 2020 for Rs. 30 lakhs, you would have realized a profit of Rs. 5 lakhs. This profit would be categorized as Short-Term Capital Gains (STCG).
Your STCG would then be added to your total income, which includes income from all sources, such as salary, business profits, and other income streams. This combined income would then be taxed according to the applicable income tax slab.
Long-Term Capital Gains (LTCG) Tax
Long-term capital Gains (LTCG) tax applies to the sale of a property held for more than one year. The holding period was previously two years, reduced from three years in the 2017 Budget.
The LTCG tax rate is currently 12.5%, down from 20% in the 2024 Union Budget. This tax is levied in addition to the regular income tax payable on income from salary, business profits, and other sources.
Under the revised capital gains tax rules introduced in the 2024 Union Budget, LTCG is calculated as the difference between the property’s purchase and sale prices.
Prior to this change, LTCG calculations considered inflation by factoring in the cost of inflation during the holding period. This allowed for the benefit of indexation, which adjusted the purchase price to reflect its current-day value.
However, the 2024 Union Budget removed this benefit for the Financial Year 2024-25.
TDS (Tax Deducted at Source)
TDS is another crucial element in the tax implications when selling a property. Buyers are required to deduct TDS at the time of payment and deposit it with the Income Tax Department.
TDS for Indian Residents
Tax Deducted at Source (TDS) is a mechanism where a portion of the payment made to a seller is withheld by the buyer and directly deposited to the government on behalf of the seller. As the name implies, this tax is deducted at the source of the transaction.
Under Section 194IA of the Income Tax Act, 1961, TDS is applicable at a rate of 1% of the total sale consideration for property transactions.
For instance, on a sale of ₹60 lakh, the buyer deducts ₹60,000 as TDS and pays the remaining ₹59.4 lakh to the seller.
TDS for Non-Residents
Non-resident Indians (NRIs) are also obligated to file income tax returns for any income earned within India and must have a Tax Deduction Account Number (TAN).
Furthermore, they are entitled to claim tax deducted at source (TDS) when submitting their tax returns. For NRIs, TDS is higher, as they fall under Section 195.
Types of Property and Their Tax Implications
Residential Property
When selling residential property, both capital gains tax and TDS apply. Sellers can claim exemptions on LTCG under Sections 54 and 54EC by reinvesting the proceeds into another residential property or specified bonds.
Commercial Property
Tax implications on commercial properties are similar to those on residential properties. However, tax-saving options are limited, as exemptions like Section 54 apply specifically to residential property reinvestments. Depending on the holding period, the seller must factor in either STCG or LTCG.
Other Taxes to Consider While Selling Property in India
Like there are some levied taxes for renting property in India, there are also taxes to consider when selling property, other than capital gains tax.
These additional levies can significantly impact the overall transaction cost and must be factored into financial planning.
Stamp Duty
Stamp duty is a state-level tax imposed on property transactions. Although primarily a buyer’s responsibility, sellers must ensure the transaction is legally documented, and stamp duty is paid. Depending on the state, rates typically range from 4% to 7% of the property value.
For example:
Goods and Services Tax (GST)
GST applies only to under-construction properties or when selling commercial properties. It is not applicable to completed and ready-to-move properties. The current GST rate for under-construction properties is 5% (without input tax credit).
Wrap Up
Understanding the tax implications is critical for anyone planning to sell residential or commercial real estate. Whether you are dealing with capital gains tax, TDS deductions, or additional levies like stamp duty and GST, each factor impacts your overall profit.
ORO Proptech offers valuable insights and tools to help streamline property transactions, ensuring sellers maximize their profits while staying compliant with tax regulations.