For those working with reputed builders in Kochi, it’s crucial to be aware of LTCG tax and its impact on real estate transactions. Let’s break down the key aspects of LTCG tax on property.

What is Long-Term Capital Gains (LTCG) Tax on Property?

When you sell a property after holding it for more than two years, the profit earned is considered a long-term capital gain and is subject to LTCG tax.

• The tax is levied at 20% with indexation benefits, which adjusts the purchase price for inflation to reduce taxable gains.
• If the property is sold within two years of purchase, it is classified as short-term capital gains (STCG) and taxed as per the seller’s income tax slab.

How is LTCG Tax Calculated?

The long-term capital gain is determined using the formula:

LTCG = Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)

Sale Price: The actual price at which the property is sold.

Indexed Cost of Acquisition: The original purchase price adjusted for inflation using the Cost Inflation Index (CII).

Indexed Cost of Improvement: Any capital improvements (like renovations or extensions) adjusted for inflation.

Transfer Expenses: Costs incurred during the sale, such as brokerage fees and legal charges.

Example:

If you bought a property for ₹50 lakh in 2010 and sold it for ₹1.5 crore in 2023, the indexed purchase price after adjusting for inflation would be higher than ₹50 lakh, reducing the taxable gain significantly.

Top builders in Kochi advise investors to keep all property-related documents to calculate LTCG tax correctly.

How Much LTCG Tax Do You Pay on Property?

LTCG tax on the sale of a residential property is 20% after indexation, plus an applicable surcharge and cess.

For instance, if your indexed long-term capital gain is ₹50 lakh, the tax payable would be:

• ₹10 lakh (20% of ₹50 lakh) + surcharge & cess

However, certain exemptions can help reduce or eliminate LTCG tax liability.

How to Avoid or Reduce LTCG Tax on Property?

There are legal ways to save on LTCG tax:

Reinvest in another Residential Property (Section 54)

• If you reinvest the LTCG amount in another residential property within 2 years (or construct within 3 years), you can claim an exemption under Section 54.
• This exemption is available only for individuals and HUFs (Hindu Undivided Families).

Invest in Capital Gains Bonds (Section 54EC)

• You can invest up to ₹50 lakh in specified capital gains bonds (like those issued by REC, NHAI) within 6 months of the sale to save tax.
• These bonds have a 5-year lock-in period and are tax-exempt.

Invest Under Section 54F (for Non-Residential Property Owners)

• If you sell a non-residential property (land, commercial property) and reinvest the proceeds in a new residential home, the entire LTCG amount can be exempted.

Offset Gains against Carry-Forward Losses

• If you have previous capital losses, you can adjust them against current LTCG to reduce taxable gains.

When is LTCG Tax Not Applicable?

• If you inherit a property and sell it, the purchase date of the previous owner is considered for LTCG calculations.
• If the sale is due to compulsory land acquisition by the government, LTCG tax may not apply.

Investors working with premium builders in Kochi must consult tax advisors before making large transactions to optimise tax liability.

FAQs

How do I avoid long-term capital gains tax on my property?

You can avoid LTCG tax by reinvesting in another residential property (Section 54), investing in capital gains bonds (Section 54EC), or adjusting previous capital losses against gains.

What is an example of a long-term capital gains tax on property?

If you bought a house for ₹60 lakh in 2015 and sold it for ₹1.2 Crore in 2023, the indexed purchase cost would be adjusted for inflation, and LTCG tax (20% after indexation) would apply to the profit.

What are the rules for capital gains tax on property?

• LTCG applies if the property is held for more than 2 years.
• The tax rate is 20% with indexation benefits.
• Exemptions are available under Sections 54, 54EC, and 54F.

How much tax do you pay on property under LTCG?

The LTCG tax rate is 20% after indexation, plus applicable surcharge and cess, depending on your total taxable income.

Conclusion

Understanding Long-Term Capital Gains Tax (LTCG) is crucial for property owners and investors looking to optimise their real estate transactions. Whether you’re selling a home or reinvesting in a new one, proper tax planning can significantly reduce tax liability.

At Siddhi Homes, one of the best builders in Kochi, we assist homebuyers and investors in making informed decisions. Whether you’re purchasing a new home or planning a sale, our expert team can help you navigate the complexities of real estate investment.

Explore our premium projects and make the most of your property investments with strategic financial planning!