Any person involved in selling a property in India has to deal with tax issues especially so called capital gains tax. Growing your finances is not that easy, especially considering how complex tax laws are. Below, let’s break the crucial aspects down.
1. Types of Capital Gains on Property Sale
In India, there are two types of capital gains while selling a property that is:
Short Term Capital Gains (STCG):
- Selling of a property within three years of acquiring it, is referred to as short term capital gain property.
- Sale of a property whose money earned from the sale is taxed at Income tax slab Rate.
Long Term Capital Gains (LTCG):
- Sold after three years of acquiring a property is called as Long Term Capital gain.
- 20 % of the sale amount is put to tax after the adjustment for the inflation prevailing at the time of purchasing the property.
2. How to Calculate Capital Gains
Subtract the selling price from the purchase price to enable one to determine the capital gains.
Cost of Acquisition consists of phrases that include …
- The money invested to buy a piece of real estate.
- Other costs eligible such as stamp duty, registration fees, and brokerage commissions.
3. Ways to Save Capital Gains Tax
There are provisions made within the income Tax Act that saves the Tax on capital gains:
a. Purchase another house i.e. Reinvestment in Residential Property (Section 54):
- The sale proceeds have to be reinvested into another ready property within two years or an under-construction property within three years.
- The satisfaction of the capital gains exclusion will be in the case where the reinvestment expenditure equals or is higher than the sales proceeds.
b. Investment in Bonds (Section 54EC):
- There is a possibility of investing in certain capital gain bonds within 180 days of the transfer of the property.
- Maximum limit:- INR 50 lakhs.
c. Setting Off Against Losses:
- There is a possibility of offsetting the capital gain with any capital loss suffered in the same financial year.
4. Timelines to Reinvest And Avoid Paying Capital Gains Tax
In order to minimize or avoid capital gains tax:
- Reinvestment After Two Years However Not More than Three Years for a Residence Property: Tax can be avoided, if a residential property is purchased by the taxpayer 2 years after the transfer of the other capital asset.
- New Residential Property Within A Period Of Three Years: Tax can be avoided by constructing a new residential house within 3 years of the other real estate is sold.
- Investment In Capital Gain Bonds Within A Period Not Exceeding Six Months Of The Sale: Purchase of capital gain bonds such as REC or NHAI bonds within 6 months after the sale to avoid tax.
5. Benefits of Indexation
Provided that properties are held over the long term, the investor may be able to take advantage of the inflationary effect through indexation. Thus reduces a significant amount of the taxable portion.
6. Exemptions to Note
Furthermore, there are some exempt cases:
- The property that has been sold was used as the principal residence by the seller entitles the taxpayer to an exemption of CGT up to Rs 2 crores as provided in this section 54.
- When you inherit a house and sell it later on, the owner before you is taken into consideration as the one who held it and this may make it look like long-term capital gains instead.
Conclusion
In India, understanding capital gain tax implications is important for making a wise decision while selling a property of any type. There are various options to reduce or postpone a tax burden, either through reinvestment or by availing of the exemptions.
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