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  • How to calculate Capital Gains Tax on House Sale

    As per the rules and regulations laid down by the Income Tax Act, any gains or losses made due to the sale of a capital asset - such as a house in this instance - is liable to be taxed. This particular form of tax falls under the category of Capital Gains. Any tax that is paid on any gains made from the sale of capital assets is termed as Capital Gains Tax, while any loss made on the sale of capital assets is termed as a Capital Loss.

    Capital Gains computation on Sale of a House:

    In order to compute the capital gains on the sale of a house, the following conditions should be taken into consideration:

    • Short Term Capital Gains - If you have sold your house within a three year period from the time you purchased it, then the profits from the sale are considered to be a short-term capital gain. These gains become a part of your total income and will be taxed as per the existing slab tax rates.

    • Long Term Capital Gains - If your have sold your house after a three year period from the time of purchase, then any profits from the sale is considered to be a long-term capital gain. Following indexation, this gain will incur a tax of 20%. However, tax exemptions can be claimed in this case unlike in the case of short term capital gains.

    • Home Loan - If you have purchased a house after taking out a home loan, and consequently sold the house within a period of five years, then there will be a reversal of any tax benefits that you have claimed under Section 80C. All tax deductions that you claimed under Section 80C in the previous years will become a part of your total income in the year of the sale of the house.

    Formula to calculate Capital Gain on Sale of a House:

    • Short Term Capital Gain is calculated by deducting the sum of the following costs form the final sale price of the house:
      • Acquisition Cost
      • House Improvement Cost
      • Transfer Cost
    • Long Term Capital Gain is calculated by deducting the sum of the following costs from the final sale price of the house:
      • Indexed Acquisition Cost
      • Indexed House Improvement Cost
      • Transfer Cost

    How to calculate Capital Gain Tax on Sale of a House?

    Calculating capital gain tax on the sale of a house can be done in the following ways:

    1. Calculation of Short Term Capital Gain Tax on Sale of a House:
    2. Short term capital gains are ascertained by calculating the difference between the price of acquisition of the house and the sale price of the house, provided that the sale has taken place less than three years after the date of purchase of the house. The tax that will be levied on these gains entirely depends on which slab the individual falls under ie: 10%, 20% or 30%

      Short term capital gains on the sale of a house can be calculated as follows:

      ParticularsAmount in Rupees
      Sale price of the houseXXXXXX
      Less: Any transfer expenses such as brokerage, commission etcXXXXXX
      Net Sale ConsiderationXXXXXX
      Less: Acquisition price of the houseXXXXXX
      Less: House improvement costsXXXXXX
      Short Term Capital GainXXXXXX

      Example for Calculation of Short Term Capital Gain Tax on Sale of a House :

      Mr. Kumar purchased a house for Rs 50,00,000 on June 25th 2013. He then sold the house for Rs 65,00,000 in September 2015. His brokerage costs amounted to Rs 70,000 and the costs he incurred on improvement of the house amounted to Rs 1,30,000. Since the sale of the house took place within three years after he purchased it, his short term capital gain can be calculated as follows:

      ParticularsAmount in Rupees
      Sale price of the house65,00,000
      Less: Any transfer expenses such as brokerage, commission etc70,000
      Net Sale Consideration64,30,000
      Less: Acquisition price of the house50,00,000
      Less: House improvement costs1,30,000
      Short Term Capital Gain13,00,000

      Therefore, his short term capital gain of Rs 13,00,000 will attract a tax rate of 30% as per existing income tax rate slabs, which amounts to Rs 3,90,000.

    3. Calculation of Long Term Capital Gain Tax on Sale of a House:
    4. Long term capital gains can be determined by calculating the difference between the sale price of the house and the indexed acquisition cost of the house, provided the sale of the house has taken place after three years from the date of purchase of the house.

      The indexation factor can be calculated by dividing the Sale Year’s Cost Inflation Index by the Purchase Year Cost Inflation Index. Once this has been determined, the indexed acquisition cost of the house can be calculated by multiplying the initial purchase price of the house and the indexation factor.

      Long term capital gains on the sale of a house can be calculated as follows:

      ParticularsAmount in Rupees
      Sale price of the houseXXXXXX
      Less: Any transfer expenses such as brokerage, commission etcXXXXXX
      Net Sale ConsiderationXXXXXX
      Less: Indexed acquisition cost of the houseXXXXXX
      Less: Indexed house improvement costsXXXXXX
      Gross Long Term Capital GainXXXXXX
      Less: Any exemptions available under sections 54, 54B, 54D, 54EC, 54ED, 54F, 54GXXXXXX
      Net Long Term Capital GainXXXXXX

    Illustrative Example for Long Term Capital Gain Tax on Sale of a House:

    Mr. Joshi purchased a house for Rs 45,00,000 on January 16th 2010. He then sold the house for Rs 95,00,000 in September 2015. His brokerage costs amounted to Rs 1,00,000 and the costs he incurred on improvement of the house in 2010 amounted to Rs 5,00,000. Since the sale of the house took place after three years from the date he purchased it, his long term capital gain can be calculated as follows:

    Step 1: Calculate the Indexation Factor:

    The cost inflation index for the purchase year 2010 is 711 and the cost inflation index for the sale year 2015 is 1081.

    Therefore the indexation factor is 1081 divided by 711, which is 1.52.

    Step 2: Calculate the Indexed Acquisition Cost:

    This can be calculated by multiplying the purchase price of the house, which is Rs 45,00,000 with the indexation factor of 1.52.

    Therefore the Indexed Acquisition Cost is 45,00,000 X 1.52 = 68,40,000

    Step 3: Calculate the Indexed Home Improvement Cost:

    This can be calculated by multiplying the home improvement costs, which amounts to Rs 5,00,000 with the indexation factor of 1.52.

    Therefore the Indexed Home Improvement Cost is 5,00,000 X 1.52 = 7,60,000

    Step 4: Calculate the Long Term Capital Gain on the sale of the house:

    ParticularsAmount in Rupees
    Sale price of the house95,00,000
    Less: Any transfer expenses such as brokerage, commission etc1,00,000
    Net Sale Consideration94,00,000
    Less: Indexed acquisition cost of the house68,40,000
    Less: Indexed house improvement costs7,60,000
    Gross Long Term Capital Gain18,00,000
    Less: Any exemptions available under sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G if applicableNil
    Net Long Term Capital Gain18,00,000

    On this amount of Rs 18,00,000, tax will be levied at the rate of 20%, which results in a Long Term Capital Gain Tax of Rs 3,60,000.

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