Lowering tax liability on property sale
The amount to be paid as tax on capital gains depends on the period for which the property is held by the taxpayer
Over the last few years, bu y i n g a n d s e l l i n g property has become a routine affair for most individual taxpayers. While capital appreciation is the main attraction for most, some simply park their extra funds in the real estate market. Although sale of property yields handsome returns, it may also result in a substantial tax outflow since the profit earned on sale of property is taxable as capital gains.
The amount to be paid as tax on capital gains depends on the period for which the property is held by the taxpayer. Taxpayers can avail certain benefits under the law if the capital asset is held for a period of more than 36 months. This would enable the capital asset to be categorised as long term capital asset and generally the long term capital gains (LTCG) are taxable at a concessional rate of 20%.
Further, while calculating the value of LTCG, the cost of acquisition (including the cost of improvement) is to be adjusted for inflation, generally known has indexation of cost of acquisition. Every year the revenue authorities notify the cost inflation index (CII) for that particular year.
Let’s understand this with an example. A person sells his house property for ₹ 2 crore in the financial year 2014- 15, which was purchased by him in the year 2006-2007 for ₹ 90 lakh. Further, he incurred ₹ 2 lakh for making certain improvements to the said property in year 20082009. Given these facts, the long term capital gains on sale of property shall be computed in the following manner (See box).
Various exemptions have been provided under the law to minimise the tax liability after the value of long-term capital gains is arrived at:
Investment i n another residential house property: The taxpayer may claim specific exemption(s) depending upon the nature of the property sold. For claiming these exemption(s), the taxpayer should purchase a new residential house property (‘new property’) within one year before or two years after or should construct a new property within three years in India from the date of sale of property.
Sale of residential house property: The individual taxpayer may claim exemption of LTCG arising on sale of a residential house property, up to the capital gain amount utilided to purchase or construct another residential house.
In case, the new property is sold within a period of three years from the date of its acquisition, then while computing the capital gains on such a sale, the cost of acquisition of new house property shall be reduced by the amount of capital gains claimedaimed earlier as exempt.
Sale of land: The individualvidual taxpayer may claim exemptionption of LTCG arising on salee of a land (other than a residentialential house property), up to thee sale proceeds utilised to purchasease or construct another residentialential house. However, this exemptionmption would not be available if the taxpayer owns more thann one residential house propertyty on the date of sale of land.
In case, the new property is sold within a period of three years from the date of its acquisition, thehe amount of capital gainsns claimed as exempt shall be deemed to be LTCG of thehe year in which such a salele took place.
T he t axpayer s houldld de posit any unutilisedd amount before the filing of tax return, under the capital gains accounting scheme in a designated capital gains bank account.
Investment in the specified bonds: LTCG can be claimed as exempt from t ax if capital gain is invested in specified bonds (i.e. NHAI and RECL bonds), within six months from the date of sale of property, up to ₹ 50 lakh.
Long term capital gains
However, if the above bonds are transferred or converted into money within a period of three years of its acquisition, the amount of capital gains claimed as exempt, shall be deemed to be LTCG of the year in which the bonds are transferred or converted into money.
It is important for taxpayers to be aware of the aforesaid beneficial provisions in order
to take the maximum benefit legitimately. The awareness of the above provisions can help taxpayers plan and execute such transactions wisely.