How do you compute capital gain on property?
To compute capital gain on property, you need to follow a systematic approach that involves several key steps and calculations. Capital gains are classified into short-term and long-term, depending on how long the property was held before selling it.
Understanding Capital Gains
Capital Gain is the profit earned from the sale of a capital asset, such as property. It is calculated as the difference between the selling price and the cost of acquisition, adjusted for any improvements made to the property and any expenses incurred during the sale.
Key Terms
- Full Value of Consideration: The total selling price of the property.
- Cost of Acquisition: The original purchase price of the property.
- Cost of Improvement: Any additional expenses incurred to enhance the property.
- Expenses on Transfer: Costs associated with selling the property, such as brokerage fees.
Steps to Calculate Capital Gain
Determine the Selling Price: Identify the full value received from selling the property.
- Subtract Expenses on Transfer: Deduct any costs incurred during the sale from the selling price.
- Subtract Cost of Acquisition: Deduct the original purchase price of the property.
- Subtract Cost of Improvement: Deduct any costs incurred for improvements made to the property.
- Calculate Capital Gain: The result after all deductions is your capital gain.
Example Calculation
Let's consider a hypothetical scenario to illustrate how to calculate capital gain on a property:
- Selling Price (Full Value of Consideration): ₹40,50,000
- Expenses on Transfer: ₹50,000
- Cost of Acquisition: ₹10,00,000
- Cost of Improvement: ₹12,00,000
Now, we can calculate the capital gain step-by-step:
1. Calculate Net Sale Value:
Net Sale Value = Selling Price - Expenses on Transfer = 40,50,000 - 50,000 = 40,00,000
2. Calculate Capital Gain:
Capital Gain = Net Sale Value - Cost of Acquisition - Cost of Improvement
= 40,00,000 - 10,00,000 - 12,00,000 = 18,00,000
Thus, in this example, the long-term capital gain from the sale of the property is ₹18,00,000
Understanding these calculations is crucial for accurately reporting capital gains and complying with tax obligations related to real estate transactions.
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