SAVING CAPITAL GAIN TAX ON PROPERTY SALE
Selling a House Property? Worried about a huge tax on Profit? You can still save tax on selling a house property! Let’s understand this through this article.
As an owner of the property, we have to pay capital gain tax while selling a House Property due to profit earned on the same. There are no deductions available on such profit like 80C, 80D, etc but there are other ways through which we can save capital gain tax.
Classification of the property depends on the holding period of such capital assets i.e., Long term and short-term. If the property was held for more than 24 months then it should be considered the Long term and if the property is transferred before 24 months then it will be considered the Short term.
Long-term capital gains are taxed at the rate of 20% and it allows indexation benefits as well and short-term capital gains are taxed at the applicable slab rates.
How to save capital gain tax on the sale of Property?
- Purchase or construct a residential property:
We can use the provisions of Section 54 to reduce the burden of capital gain tax or even eliminate it by constructing or buying a residential house. This exemption is applicable only in case of long-term capital gain. Exemption available shall be an investment made in new house property or the amount of capital gain whichever is lower.
Conditions to fulfill:-
- New House Property should be purchased 1 year before or 2 years after the sale of the original property
- In case of construction, the new property must be constructed within 3 years of the sale of the original property.
- The New House property shall be located in India
- Lock In period shall be of 3 years i.e., new house property should not be sold before 3 years. If it is sold before 3 years then the exemption shall be taken back and capital gain shall be computed accordingly.
This exemption can be claimed for two house properties if capital gain does not exceed 2 crores. Please note that this option can be claimed only once in the lifetime of the taxpayer.
- Investment in Specified Bonds:
Another way to claim exemption on capital gain tax is by investing in bonds notified by the government as per Section 54EC. This exemption applies to Long term capital Gain.
Conditions to fulfill:
- Investment should be made within 6 months from the date of the sale of the property.
- Maximum exemption of Rs. 50 Lakhs can be claimed
- Lock In period is of 5 Years i.e., investment can be redeemed only after 5 Years
Eligible Bonds:
- Rural Electrification Corporation Limited or REC bonds
- National Highway Authority of India or NHAI bonds
- Indian Railway Finance Corporation Limited or IRFC bonds
- Power Finance Corporation Limited or PFC bonds
- Investing in specified companies:
The exemption can be claimed by investing the sale proceeds in equity shares of specified companies (Startups) as per Section 54GB. This exemption can be claimed on Long Term Capital Gains.
Conditions to be fulfilled:
- The person claiming the deduction shall be an individual/HUF as others cannot claim an exemption under this section like co., LLP, etc.
- The taxpayer uses the net consideration for the subscription of equity shares of an eligible co. before the due date of filing the ITR
- Eligible co. within 1 year of subscription uses the money to purchase new assets.
- Lock In period – 5 Years
Eligible companies:
- The company is incorporated in India
- The company is incorporated during the previous year in which the taxpayer earns a capital gain
- The company is in the business of manufacturing an article or a thing.
- The taxpayer has more than 50% share capital or more than 50% voting rights after he/she invests in the subscription of equity shares of the company.
- The company is a medium or small enterprise under the Micro, Small, and Medium Enterprises Act, 2006 or it is an eligible start-up.
Capital Gain Account Scheme
In case the investment is not made within the prescribed time then money can be deposited in an account name Capital Gain Account Scheme to avail of the tax exemption. Deposit in this account shall be made on or before the due date to file ITR or before the actual ITR is filed, whichever is earlier. The deposited amount can be withdrawn anytime for investing but if the amount is not invested within prescribed limits mentioned in specified sections like 2 years in case of buying a new house property then capital gain shall be taxable.
There are some ways in which you can claim exemption from capital gain tax as stated above. Now, you have to financially analyze all sections before making a decision.
You can also contact us at info@taxreturnwala.com for any taxation consultancy.