Real estate is a significant part of an investor’s pie. It is also a time tested asset, which almost always appreciates except in times of severe economic downtrends, when it’s temporarily affected. In fact, buying real estate for investment purposes and selling it later at a higher price has become very common among investors. Banks and other financial institutions (NBFCs or non-banking financial institutions) have also helped in this trend by providing easy loans to investors.
What is confusing for many investors though is the tax structure on these real estate transactions. This article will explore the tax liability on such transactions, also known as capital gain (or loss depending on whether the investor made money on the transaction).
Capital Gain Tax Structure.
The income tax rules define gain in two broad categories; namely short term capital gain (STCG) and long term capital gain (LTCG). If investors buy and sell assets within 3 years, this comes under short term capital gain. If investors buy real estate, keep it for more than 3 years and sell, it comes under long term capital gain.
For short term capital gain, the gain from asset is added to the investor’s income and taxed as per the income slab they fall under. For example, if an investor falls under the tax slab of 30%, the gain will also be taxed at the rate of 30%.
For long term capital gain, tax calculation involves what is known as indexation. The acquisition cost or cost of acquiring the asset is recalculated based on indexation. Indexation is a concept, which factors inflation in its calculation by using a factor called cost inflation index (CII). The cost inflation index number is published every year by Reserve Bank of India (RBI) and people can use it to find out the taxable gain on the transaction.