If you decide to sell a property in India, you must look at the calendar first. If you fail to do so, you may end up paying a hefty tax.
Let us delve deeper.
If you sell your property within two tears of purchasing it, any profit from the sale is treated as short term capital gain. This is added to the total income of the seller and taxed according to the slab rate applicable to him. There is no provision for any rebate or relaxation except that you can set it off against any short term capital loss from investment in gold or stocks.
However, if you sell your property only after 2 years of purchase (3 years for land), you are allowed to deduct the Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price to arrive at long term capital gains amount. Indexation is done by applying CII (cost inflation index). This increases your cost base (and lowers your gains) since the purchase price is adjusted for the impact of inflation. Moreover, the consideration so received or accrued as a result of the transfer of the residential unit shall be adopted to calculate the capital gain, if the stamp duty value is up to 120% of the consideration.
Long term capital gains are taxed at 20.8% irrespective of your tax slab.
There are a few ways to save on the long term capital gains tax when you sell your property. Let’s examine them in little more detail.
How Many Properties?
With effect from Assessment Year 2021-22, a taxpayer has an option to make investments in two residential house properties in India to claim an exemption under Section 54. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gains does not exceed Rs 2 crore.
Save LTCG by Investing in a New Property
You can save LTCG if you invest the capital gains amount from the sale of a property in buying another property subject to certain conditions.
You must purchase this house within 1 year before the date of transfer or 2 years after that, or construct a house within 3 years. You must not sell this house property within 3 years of purchase or construction. Moreover, you must not own more than 2 residential houses (including the new one) on the date of transfer. Additionally, you must not buy another house property within a period of 2 years or build another house within 3 years after the transfer date.
The relaxation in tax would be reversed if you sell the new property within three years of its purchase. The profit earned on this sale will also be treated as short-term capital gains.
The total amount of profit must be reinvested in the new house property to claim exemption of the entire LTCG amount. Otherwise, the exemption will be limited to the amount re-invested. Suppose you earned Rs 10 lakh as profit on the sale. The entire amount will become tax-free if you reinvest Rs 10 lakh to buy a new property. In case you only spend Rs 5 lakh on the new property, the remaining Rs 5 lakh would attract tax.
All the associated charges included in the purchase of the new property, i.e., stamp duty, registration charge, brokerage fee can be included in the purchase cost of the new house. Similarly, any money spent on repairs and renovation can also be added to the overall purchase cost, while computing LTCG.
Invest in Capital Gains Account Scheme
To claim an exemption under Section 54, the taxpayer should purchase another house within a period of one year before or two years after the date of transfer of the old house or should construct another house within a period of three years from the date of transfer.
However, finding a suitable seller, arranging the requisite funds, and getting the paperwork in place for a new property purchase can be a time-consuming process.
If you have not been able to invest your capital gains (in full or part) until the date of filing of income tax return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your unutilized gains in a PSU bank or other bank as per the Capital Gains Account Scheme. You can claim this as an exemption from your capital gains in your return, and you won’t have to pay tax on it.
The new house can be purchased or constructed by withdrawing the amount from the said account within the specified time limit of 2 years or 3 years, as the case may be.
Invest in Specific Bonds to Save LTCG
You can also save tax on your long term capital gains under Section 54EC by investing the taxable amount in certain bonds. Bonds issued by the National Highway Authority of India (NHAI), Railway Finance Corporation or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 5 years and must not be sold before the lapse of 5 years from the date of sale of the house property.
You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. However, you are allowed to invest a maximum of Rs 50 lakh in a financial year in these bonds. Interest earned on these bonds is entirely taxable. However, the maturity proceeds are fully tax-free.
Save LTCG under Section 54GB
You can also claim exemption of LTCG under Section 54GB if you invest the taxable amount for subscribing to the equity shares of eligible companies. The exemption would be available if the profit is reinvested in small or medium enterprises or in eligible start-ups which may utilize the amount in purchasing new assets such as plants and machinery within 1 year.
Let’s also remember that you can also set off the long term capital gains against any loss arising out of the sale of other long-term assets such as equity shares or gold. These could be the losses carried forward in the last eight years, along with the losses incurred in the year in which you are claiming the benefit.
It is important to consider the impact of taxation before entering into any property transaction, otherwise, there can be substantial outgo on account of taxes.
