Property Tax In India - An Inside Out Layman’s Look

Published: March 2, 2013

Whether you buy or sell property for a living or just a one time buyer or seller, you must have an inside out look at how tax will affect you.

There are two types of tax regimes applicable on buying or selling property in India, short and long term. The short term and long term tax rate applied on buying or selling of property in India seems to be the same but the difference comes in inflation indexation that may be overlooked by a cursory glance at the buying selling process.

Short term property gain tax is applicable when you have bought a property and sold it within three years of purchase. In this case you will be paying tax on profit gains after deduction of acquisition price, money spent on property improvement, and transfer cost. The gain becomes part of the taxable income and you will have to pay tax on it as per your applicable tax slab. Similarly, if buying the property and selling it in short term resulted in a loss, you can carry forward that loss to claim tax deductions for up to eight years.

On the other hand, long term profit gains on property are considered different. Property sellers who owned a property for more than three years will get the usual deductions of acquisition cost and property improvement but these adjustments will be inflation adjusted thus reducing the property margins considerably down for periods extending to more than five years.

For simple understanding you can calculate property tax gain using these formulae:

Short Term (Less than three years)

Short Term Capital Gain = Sale Price – (Cost of Acquisition + Cost of Improvement + Cost of Transfer)

Long Term (More than three years)

Long Term Capital Gain = Sale Price – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer)

Indexed Cost = Cost Incurred X (CII* of year of transfer / CII of year of acquisition or expenditure)

One drawback of having long term capital gains on property sale in India is that you cannot claim regular tax deductions. However, if you fall under the tax exemption limit, then your capital gains will not be taxed.

Whenever you are making a property deal in India; calculating profits, taxes, and exemptions can make the buying selling agreement very complex. There are many companies that offer legal ready to use documents that can help overcome all this hassle.

You can buy a comprehensive property sale agreement from Net Lawman India which covers all aspects of buying and selling properties in India. The agreement will cover all eventualities, ensuring that you do not miss onto something very important. This document covers all aspects of your protection as a buyer or seller. In case you face any problem understanding anything, all you need to do is follow up the explanatory notes. Flexibility has been added to undertake all kinds of situations that may arise due to any type of buying or selling agreement, no matter how unique it is. Above all, the document also guides you as to how you can proceed with dispute resolution and jurisdiction issues.

(This is a Guest Post by Mr. Fahad Zahid from Net Lawman Ltd., UK.)

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