If you are planning to sell your property, you’ll have to pay capital gain tax on the profit earned after considering the inflation and indexed cost of acquisition. However, there are several ways to save on the capital gain tax on sale of property.
Selling a house is a gargantuan and tedious task in itself, add to that the fact that you will be charged a tax on your capital gains and you have the perfect recipe for a headache. If you’re selling a property in India, the profits you earn are called Capital Gains.
Whether these Capital Gains will be taxed is entirely up to the person receiving the benefits of a profit from sale, as he can choose to invest it in the given time frame and save himself from taxation on Capital Gains.
You will be taxed on the profit (capital gains) you make – which is the amount that you get after subtracting cost of acquiring (and repairing / improving) the asset from the sale value. These capital gains can be classified as short term or long term capital gains.
If you sell your land / house / property within 36 months (3 years) of acquiring it, it’s considered to be a short term capital gain. If you sell it after 36 months (3 years) it’s considered to be a long term capital gain. This differentiation between short and long term capital gains is important because both of these are treated differently in terms of taxation. The tax rates and tax benefits which are applicable on the reinvestment of these two types of gains vary.
Long term Capital Gains on sale of real estate are taxed at 20%, plus a cess of 3%, if the sale fulfils certain conditions.
If you sell a property that was gifted to you, or that you have inherited, you will still be liable to pay capital gains tax on it. The cost of purchase here is calculated on the basis of the cost to the previous owner, indexed to the year of purchase.
How to Save on Capital Gains Tax while Selling your Property?
Long term capital gains are exempted from taxation (under Section 54 of the Income Tax Act, 1961) for individuals and Hindu Undivided Families on the sale of a house property if:
- The capital gains are used to purchase or construct another house.
- The new house is purchased one year before or two years after the sale of the old house.
- The new house is constructed within 3 years after the sale of the old house.
- Only one additional house property is purchased / constructed.
- The property being bought / developed is within India’s national borders.
- You don’t sell the new house for 3 years after taking possession of it.
- If the cost of the new property is lesser than the sale amount, the exemption then only applies proportionately. The remaining money can be re-invested under Section 54EC in under 6 months.
Capital Gains Account Scheme
If you can’t construct a house immediately after benefitting from a capital gain (but plan to do so sometime in the near future), then you can put the profit amount in any public sector bank under the Capital Gains Account Scheme (CGAS). If you do this, you have 3 years in which to get your ducks in a row and get your property construction started. If not, the capital gain amount will be taxed as a long term capital gain (at 20% plus a 3% cess).
Under the CGAS scheme, there are 2 types of accounts that you can deposit your money in: Savings deposit accounts (called Type-A accounts) and term deposit accounts (called Type-B accounts). Type-B accounts have cumulative or non-cumulative interest options. You can transfer money between the two by paying the fixed charges, but you can only withdraw money from Type-A accounts if you submit a declaration that the money will be used to construct a house within 60 days. Any un-utilised funds will have to be re-deposited.
If you’ve sold land and wish to save on tax, you can also invest in specified financial assets, which will save your hard earned capital gains from taxation under Section 54EC of the Income Tax Act, 1961. To do this, you must invest in notified bonds within 6 months of its transfer.
The bonds in specific are issued by the Rural Electrification Corporation and NHAI (the National Highways Authority of India). If, within three years, you transfer or take a loan against these bonds, you will be charged capital gains tax. Keep in mind that you can only invest Rs.50,00,000 in these bonds every financial year.
The sale of farm land is not taxed under capital gains, unless it’s within the limits of (or up to 8 km away from) a municipality, municipal corporation, town committee, cantonment board or any other civic body which has a population of (or over) 10,000.
FAQs on Capital Gain Tax on Sale of Property
- Should an NRI pay taxes on gains made on the sale of property in India?
- What is capital gains tax in India on property sale?
- How can I save capital gains on my property?
Yes, NRIs selling their property in India will be required to pay tax on the capital gains. The tax payable will depend on the fact whether the gain is long term or short term.
The capital gain tax for short term will be applicable as per the income tax slab rate. Based on your annual income, you will have to pay an applicable capital gain tax.
However, for long term, the capital gain tax payable will be 20.8% with indexation.
Some of the ways through which you can save on capital gains tax on your property are:
- One of the most suitable ways to save on capital gains tax is to set off all your capital gain losses. You can set your capital gain profits against your loses, however, you must not that your losses must be from a previous date. Also, you can set your short-term capital losses only against short-term gains, and long-term losses against long-term gains. You can file your long-term losses against your long-term gains with the stipulation to carry it forward for eight years. However, you must also file your income tax on time before the final date.
- One of the ways to save on your capital gains tax is to invest in Capital Gains Account Scheme (CGAS). This scheme is suitable for those who cannot invest in a new property before filing their income tax returns. The tenure for investing in this scheme is for three years. This allows you to save so that you can purchase a property of your own. However, register for this scheme before you file your income tax returns. You must note that only certain banks in India are designated to allow their customers to invest in CGAS.
- One of the ways to save on your capital gains tax is to invest in bonds within six months of the trading of the property and receiving the gains. On investing in bonds, you can claim a tax exemption under Section 54EC of the Indian Income Tax Act, 1961. However, you must note that you will have to remain invested in these bonds for a minimum of three years. It is recommended that you do not invest beyond three years as not only will you not earn any interest, but also you will not be able to transfer these bonds to any other party.