Understanding LTCG and LTCG Tax on Property Purchased with Borrowed Money

As per Indian tax laws, you are liable to pay tax when you sell any asset for profit and this includes the property also. The tax rate depends on whether the earned profit is a short term or a long term gain. There are some exceptional cases when it becomes difficult for the tax authorities and for an individual to identify the short term or long term gain, like while computing LTCG tax on property purchased with borrowed money or including interest of delayed payment on property sold to LTCG or STCG.

Below is a short overview of ‘How Capital Gains are taxed and a case study on implementing LTCG Tax on property purchased with Borrowed Money’.

Taxing of Capital Gain (CG)

Short Term Capital Gain (STCG): If you incur a short term capital gain, it will be taxed just like your normal income as received from other sources. This means that the amount of gain on sale of capital in short term would be added to your total income for the year and will be taxed as per the tax slab applied to your overall basic income.

To present rules if you sell any property within 3 years of its purchase, it will be subjected to a STCG and will be calculated as:

STCG: Sale price of property – (Cost of Purchase + Cost of improvement + any other expenditure made on sale or transfer of property)

Long Term Capital Gain (LTCG):  It is the amount of gain received on sale of any property or long term asset as specified in the Act after holding it for more than 3 years. FY 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of immovable property being land, building, and house property.

To calculate the actual taxable LTCG on sale of any asset it is very important to determine the CII (Cost Inflation Index) of the year in which the property is sold and purchased as value of money changes over time. To calculate LTCG tax on property, below formula can be used:

Gross LTCG = Sale Price of property – (Indexed cost of property at the time of purchase + indexed cost of expensed made on improvement of property + expenditures incurred on sale or transfer of property)

Net Gain = Gross LTCG – Exemptions under 54 or 54E or 54F.

Indexed Cost Price = Purchase price of property * (CII of current year / CII of year of purchase.)

LTCG Tax on Property purchased with Borrowed Money

Case Study: I am planning to buy a flat for my own use and intend to make its payment from bank loan, past savings and by using sale proceeds of an old plot I own. But till now I am not able to sell my plot. If I borrow money from someone to buy the flat and repay the person with sale proceeds of the old plot after few months, do I have to pay LTCG Tax on sale of plot? I am going to utilise the complete sale proceeds to buy my new flat.

  • This can be worked as:
  • If you purchase the residential unit by first borrowing the funds and thereafter making the transfer of land then the capital gain earned on transfer of land will not be chargeable to tax provided that you transfer of rights to the buyer within 1 year from the date of its purchase.
  • You have to calculate the net sale consideration which will be received from sale of transfer of the land and the amount invested by you in purchase of residential unit for  claiming a deduction in Section 54 F(1).

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