If you are intended to sell your property, you have to pay capital gains tax on the profit earned after deducting inflation and the indexed cost of acquisition. On the other hand, there are various strategies to reduce the capital gains tax on property sales.
Selling a house is a lengthy and time-consuming operation in and of itself; adding to that the fact that you will be taxed on your capital gains and you have the perfect way for a headache. Capital gains are the gains you make when you sell a property in India.
It is completely up to the one who is getting the benefits of a profit from a sale whether these capital gains will be taxed, as he might decide to invest it within the specified time duration and escape capital gains taxation.
You will be taxed on your net profit, which is the exact amount you receive after deducting the cost of acquiring (and repairing/enhancing) the asset from the sale price. These capital gains can be termed either short-term or long-term capital gains.
It is considered a short-term capital gain if you sell your land, house, or property within 36 months (3 years) of purchasing it. It is considered a long-term capital gain if you sell it after 36 months (3 years).
This distinction between short-term and long-term capital gains is significant since the two are taxed differently. The tax rates and benefits that apply to the reinvestment of these two types of gains differ.
Long-term capital gains on the sale of real estate are taxed at the rate of 20% including 3% cess if the sale meet with the certain conditions. If you sell a property that was given to you or gifted to you by someone, you will still be liable for capital gains tax. The cost of purchase is calculated here on the basis of the previous owner’s cost, fixed in the year of purchase.
How To Save On Capital Gains Tax While Selling A Home
Long-term capital gains on the sale of a residential property are excluded from taxation (under Section 54 of the Income Tax Act, 1961) for individuals and Hindu Undivided Families if:
- The capital gains are used to buy or build another house.
- The new house is purchased a year before or two years after the old house is sold.
- The new house was built three years after the previous house was sold.
- Only one more dwelling property is purchased or built.
- The property being purchased or developed is located inside India’s borders.
- You don’t sell your new house for three years after you have it.
If the cost of the new property is less than the sale price, the exemption is only proportionately applicable. The residual funds can be re-invested under Section 54EC within the less than 6 months’ time duration.
How Can I Save Capital Gains On My Property?
Some methods for reducing capital gains tax on your property include:
- Setting off all of your capital gain losses is one of the best strategies to save on capital gains tax. You can set your capital gain profits against your losses, but your losses must be from a prior date. You can also set your short-term capital losses just against short-term gains and your long-term capital losses exclusively against long-term gains. You can deduct your long-term losses from your long-term gains for up to eight years if you file them. However, you must also file your income tax return by the due date.
- Investing in the Capital Gains Account Scheme is one approach to reducing your capital gains tax (CGAS). This strategy is appropriate for those who are unable to purchase a new home before filing their income tax returns. The investment period for this scheme is three years. This allows you to save money for the purchase of your own home. However, you must enrol in this programme before filing your income tax returns. It is important to remember that just a few banks in India are authorised to allow their customers to invest in CGAS.
One strategy to save on capital gains tax is to invest in bonds within six months of selling the property and getting the proceeds. Bond investments are tax-exempt under Section 54EC of the Indian Income Tax Act of 1961. You should keep in mind, however, that you must hold these bonds for at least three years. It is recommended that you do not invest for more than three years because you will not receive any interest and will not be able to transfer these bonds to another party.
Scheme For Capital Gains Accounts
If you are fails to build a house instantly after receiving a capital gain (but intend to do the same in the near future), you have the option to deposit the profit amount in any public sector bank under the CGAS scheme. If you do this, you will have three years to begin building your property. If this is not the case, the capital gain will be taxed as a long-term capital gain (at 20% plus a 3% cess).
You can deposit your money in two sorts of accounts under the CGAS (Capital Gain Account Scheme) scheme: savings deposit accounts (called Type-A accounts) and term deposit accounts (called Type-B accounts). Type-B accounts can receive either cumulative or non-cumulative interest as per the investors choice.
You can move funds between the two accounts by paying the fixed fees, but you can only withdraw funds from Type-A accounts if you file a declaration that the funds will be used to build a house within 60 days. Any currency that has not been used must be re-deposited.
If you have sold land and want to save money on taxes, you can invest in certain financial assets, which will exempt your hard-earned capital gains from taxation under Section 54EC of the Income Tax Act of 1961. You must invest in notified bonds within 6 months of their transfer to do so.
The bonds in question are issued by the Rural Electrification Corporation and NHAI (the National Highways Authority of India). If you transfer or borrow against these bonds within three years, you will be subject to capital gains tax. Remember that you can only invest Rs. 50,000 in these bonds every fiscal year.
The sale of farm land is exempt from capital gains tax unless it is within the boundaries of (or up to 8 kilometres from) a municipality, municipal corporation, town committee, cantonment board, or any other public body with a population of (or greater than) 10,000 people.