You as a property owner or an investor in real estate are likely to have heard the words ‘capital gains tax’ and ‘capital value tax’. You may also have heard the acronyms for these terms, CGT and CVT, which are often thrown around whenever there’s a real estate deal going down.
Despite a lot of effort, many people can’t really figure out what CVT is and how much CVT they are supposed to pay. More importantly, they might also have wondered why the government is charging them this tax. Let us look at the reasons.
Your property has two direct financial benefits for you. It earns rent for you when you rent it out, and it gains in value over time to give you more money when you sell it than the money you spent to purchase it.
You get the first benefit, or rent, from your property continuously over time, probably every month in the form of monthly rent. For example, when you buy a house for Rs 4,000,000 and rent it out for Rs 35,000 per month, you start earning monthly rent. For you, Rs 35,000 per month is rent, or rental income. It is the first type of financial benefit from your property or for the money you invested in the property. The government knows you are making money from your property in the shape of rent and it levies taxes on your rental income. One such tax levied on your rental income is income tax.
You do not get the second benefit of your property automatically with the passage of time. This benefit is increase in capital value of your property. This benefit keeps accumulating with the passage of time, but you do not have access to it right away. You can only get it when you sell your property. In the above example, your house purchased for Rs 4,000,000 gives you rent; it does not give you cash for the increase in its value. After five years, the value of this house may be Rs 6,000,000 but you will not get the extra Rs 2,000,000 (Rs 6,000,000 minus Rs 4,000,000) unless you sell your house. Upon selling your property, this extra 2,000,000 is your capital gain – the second financial benefit of your property.
The government knows you are earning capital gains because your property is increasing in value over time, but it does not force you to pay tax on the increased value until you sell your property. However, it does not wait even a single moment, and levies tax on the extra sum you get the second you sell your property. It is justified to tax the extra sum because the extra sum is your gain – you had paid Rs 4,000,000 but you are getting Rs 6,000,000. Three sums are involved in the capital gains tax calculations:
- The sum you pay when buying the house, i.e. Rs 4,000,000
- The sum your property gains while in your ownership, i.e. Rs 2,000,000
- The sum you get upon selling your property, i.e. Rs 6,000,000
If the rate of tax is 5%, you will pay 5% of 2,000,000, i.e. Rs 10,000. Your tax liability is NOT Rs 30,000 or 20,000 (which would be 5% of Rs 6,000,000 or Rs 4,000,000). The government uses the difference between 6,000,000 and 4,000,000 to calculate the tax.
Rates of Capital Gains Tax are as under:
|1.||Sale within one year of acquisition||5% of the capital gain or 2% of the recorded value at the time of sale, whichever is higher|
|2.||Sale between more than one but within two years of acquisition||4% of capital gain|
|3.||Sale between more than two but within three years of acquisition||3% of capital gain|
|4.||Sale between more than three but within four years of acquisition||2% of capital gain|
|5.||Sale between more than four but within five years of acquisition||1% of capital gain|
|6.||Sale after five years of acquisition||No tax.|
I hope this explanation will help you when you’re out to sell your property next time.
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