How capital gains are taxed on real estate investments in India

Property investments in India are believed to be quite safe that provides consistent year on year appreciation due to continuously elevated levels of consumer inflation and low ownership. Considering the huge population of India there is always inherent consumer demand for all type of properties in the country. 

If a real estate (commercial or residential) is bought for investment purpose and will later be sold when price appreciates, it is important to understand how the real estate capital gains are taxed in India. Like all other asset class, gains arising out of property investments fall into two broad categories - Short Term Capital Gain and Long Term Capital Gain.

Short Terms Capital Gain Tax - If the property is held for less than 3 years it is considered as short terms and the gains arising out of selling your real estate in less than 3 years is added to your total income and taxed at normal rate. For example, if an investor falls under the tax slab of 30%, the gain will also be taxed at the rate of 30%.


Long Terms Capital Gain Tax - If the property is held for more than 3 years it is considered as long terms and the gains arising out of selling your property after 3 years is taxed 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. After indexation the gains are taxed at the rate of flat 20%.However it must be noted that Investors can deduct any other cost spent on the improvement of the property. This will take tax liability further down. You can also calculate indexed cost of improvement to take it further down.


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