Minimize Capital Gains Tax on Property

To minimise capital gains tax on propery the tax-payer can either reinvest the proceeds in another property sale or invest them in Capital Gains Bond issued by the National Highway Authority of India and the Rural Electrification Corporation.

What are Capital Gains on Property?

Capital gains tax on property is the amount paid when an individual sells capital asset or property that they own. The capital gain tax is charged on value of the profit made when selling the property. The difference between the initial price at which the owner purchased the property and the value at which they sell it is considered as the profit and capital gains tax is charged on the same.

Listed below are the two types of capital gains on property.

  • Short Term Capital Gains Tax: Short term capital gains tax is applicable if you sell a property at profit within 3 years from the date of original purchase of the property.

  • Long Term Capital Gains Tax: Long term capital gains is applicable when the property is sold after 3 years at a profit and a capital gains tax of 20% is applicable after indexation in this case.

Strategies to reduce Capital Gains Tax on Property

There are many ways in which one can reduce capital gains on tax property.

Reinvest: One of the best way to save on capital gains tax incurred from selling a property for profit is by reinvesting all the proceeds availed from the sale in another property within a certain time frame. The proceeds can be reinvested only in a residential property and not a commercial property. The purchase of the new residential property should be done within two years and in case of construction of a new property, a time frame of three years is allowed. It is important to keep in mind that in order to avoid capital gains tax in this scenario, the new property should be the second home other than the current house. An individual can’t use this strategy to save on capital gains tax if they already own more than one property.

Capital Gains Bonds: One can also save on capital gains tax by investing the proceeds from the sale of the property in Capital Gains Bonds. Currently, two government entities, the National Highway Authority of India and the Rural Electrification Corporation can issue these bonds. The maximum amount that one can invest in these bonds is Rs.50 lakh. The rate of interest offered is pretty low at 6% but the chances of these bonds defaulting is almost none as they are government backed schemes.

Construct Again: One can get a leeway of three years by using the sales proceed of the property to construct another property.

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