There are a couple of changes made in taxes on the sale of property in the finance act 2020.
Question, do I have to pay any tax if I sell my property?
Well, the answer is yes.
Only in certain cases.
There are two taxes payable on the property sale.
- Withholding tax or Advance tax
- Capital Gain tax
The holding period for both taxes has been reduced to 4 years. Previously, it was 8 years for an open plot.
What it means?
You won’t pay any tax if you sell your property after 4 years of its purchase.
There will be no gain tax charged in case you sell your personal house at any time provided you are personally living in it.
I hope you got the big picture.
Now, how much I pay if I sell my property within 4 years of purchase.
Here is the answer.
First, we deal the Capital Gain tax.
Capital Gain Tax
For this tax we have to calculate the amount of gain on which we will apply the tax rate.
Do you know what is capital gain?
If you don’t, then its the difference between the sale value minus the purchase value of your property.
Bear with me and I will explain every thing with a cool example.
The calculation of capital gain will be as follows:
- In case of sale of property in the first year, the full amount
- 2nd year, it will be ¾ of the gain
- 3rd year, it will be 1/2
- And in 4th year, it will be ¼ of the gain.
Capital Gain Tax Rate
The tax rate on Capital Gain will be as follows:
- If the gain is up to Rs 5 million, the tax rate will be 2.5%
- For 5 to 10 million, it will be 5%
- Between 10 to 15 million, it will be 7.5%
- For the above 15 million, it will be 10%.
Withholding Tax or Advance Tax
The advance tax rate is 1% of the recorded sale value (yes, recorded value) for filers and 2% for non-filers.
It’s simple, right?
Now, its time to explain the whole thing with an example.
Mr. Ali purchased a property of Rs. 1,000,000 in February 2018.
Facing a financial crunch, he sold it in June 2020. The property value was now Rs. 1,400,000.
The amount of capital gain in this case is 1,400,000 – 1,000,000 = Rs. 400,000.
Since Mr. Ali sold it in 3rd year, we will take 1/2 of the amount i.e Rs 200,000 for the calculation of capital gain tax.
The tax rate is 2.5% as the amount of gain is under 5 million.
So the capital gain tax will be
200,000 x 2.5% = Rs. 5,000
The advance tax rate is 1% as Mr. Ali is a filer.
So the tax payable is will be
1,400,000 x 1% = Rs. 14,000
Remember, advance tax is adjustable. You get it back when you file your tax return.
I hope you understand now about the taxes payable on property sale as per finance act 2020.
If not, then re-read my post 🙂