Deductibility of Brokerage from Long-Term Capital Gains on Sale of Immovable Property in India

In India, when calculating Long-Term Capital Gains (LTCG) from the sale of immovable property, the brokerage fees paid for the sale can be deducted from the sale proceeds. This is considered a cost of transfer and is allowed under Section 48 of the Income Tax Act.

Understanding LTCG Calculation

To understand how brokerage deduction works, it’s important to familiarize yourself with the key components involved in the process:

Sales Consideration

The first step is the Sales Consideration, which is the total amount received from the sale of the property.

Brokerage Fees

The brokerage fees paid for the sale are then deducted from the sales consideration. It is commonly charged as 1 to 2 percent of the sales consideration, though this can vary based on market practices.

Other Deductions

Other expenses incurred during the sale, such as legal fees and registration charges, can also be deducted. These are often included under the category of lsquo;expenses on ;

Using the formula for calculating LTCG:

LTCG Sales Consideration - Cost of Acquisition - Cost of Improvement - Expenses on Transfer (including brokerage)

Example Calculation

Let’s consider an example to understand this better. Suppose the sales consideration is Rs. 10,000,000, the brokerage is Rs. 200,000, the cost of acquisition is Rs. 3,000,000, and the cost of improvement is Rs. 1,000,000.

The LTCG would be calculated as follows:

LTCG Rs. 10,000,000 - Rs. 3,000,000 - Rs. 1,000,000 - Rs. 200,000 Rs. 5,800,000

Therefore, Rs. 200,000 brokerage is deductible from the long-term capital gain calculation.

.Photo: Simplifying LTCG Calculation with Brokerage

Disallowance and Documentation

While brokerage is generally allowable, there is no specific percentage or amount mentioned in the Income Tax Act. The provision of Section 48 allows any expense incurred on the transfer of a Capital Asset to be deducted while computing Capital Gain.

However, if the brokerage is shown to be more than the assessed officer (AO) finds reasonable, it may be disallowed, and the LTCG will be recomputed accordingly. The AO may require proof of the actual brokerage amount paid to satisfy their scrutiny.

Disclosure and Reporting

The complete amount of brokerage paid in relation to the sale of immovable property is allowed as a deduction while computing the long-term capital gain.

The amount of brokerage can be disclosed as part of the lsquo;expenses in connection to transferrsquo; while filing the Income Tax Return (ITR). Ensuring accurate documentation and supporting papers can help in smoother tax filing and less hassle in case of scrutiny by the tax authorities.

By understanding the process and ensuring accurate documentation, one can effectively manage their tax liabilities and ensure compliance with the Income Tax Act.