If you can't invest your profits in another house or bonds before you file your tax return for the year of the sale, deposit the balance in the Capital Gains Account Scheme so that you are eligible for the deduction.
Selling a property can make you money, but it also comes with tax aspects. If you sell a property you've owned for over two years, you will need to pay a long-term capital gains (LTCG) tax, which is taxed at a flat rate of 20 per cent. Indexation modifies the property's purchase cost to consider inflation, thereby lowering the number of capital gains and subsequently the tax on it.
To take advantage of this, hold onto the property for at least two years, as it is only available for LTCG. Indexation considers inflation over the ownership period and adjusts the purchase price, thereby slashing the tax burden for the seller. LTCGs also offer additional benefits, but no such benefit is provided for short-term gains.
Suneel Dasari, founder and CEO of EZTax.in said, “People should carefully time the sale of real estate because long-term sales have tax-minimizing reinvestment and indexation benefits, apart from improvement costs.”
How To Avoid Tax: When selling a house you can dodge taxes in different ways. For instance, you could reinvest the entire profit from the sale to buy another house within two years or construct one within three years. The same rule applies when you buy a new house a year before selling the first one. However, the new property should have been bought in the name of the seller.
If you don't invest all the capital gains, the balance amount is charged to LTCG. But if you sell the new property within three years, your entire tax exemption will be reversed. The entire capital gains from selling the previous house will be considered short-term gains and taxed at the normal slab rates. x
Co-owing A Property: When you jointly own a property, you can divide the capital gains from the sale among the co-owners based on their ownership share. This lets each co-owner use their individual basic exemption limit, potentially reducing the overall tax liability.
Bring Down Selling Expenses: Remember to deduct certain selling expenses from the price when calculating capital gains. These costs, like brokerage fees, can decrease the capital gains and, in turn, the tax payable. Also, residing in the house for over two years and keeping track of expenses for improvements or renovations can help reduce the taxable capital gain amount by adding these expenses to the cost of the house.
Purchase New Property: One common way to reduce taxes on selling a home is to reinvest the capital gains in another residential property. You will need to buy a new property either one year before or two years after the sale, to qualify for this exemption under Section 54 of the Income Tax Act, 1961. Also, you can claim the exemption, if you construct a new property within three years after the sale.
“Section 54 of the income-tax act allows an exemption if the capital gain is reinvested in a new residential property. This property should be purchased either one year before or two years after the sale of the property. Similarly, in the case of the construction of a new property, this should be completed within three years of the sale,” Abhishek Soni, CEO, Tax2Win, an income tax portal said.
Claim Selling Expenses: While calculating the capital gains, individuals can claim an exemption for certain selling expenses like brokerage fees, expenses incurred on improvement or repairs of the property, etc.
Invest In Bonds: You can also invest in the specified time capital gains in government-specified bonds and claim an exemption under section 54EC of the income-tax act.
Park Funds In Capital Gains Account Scheme: “If you are unable to invest the amount immediately, you can park the funds in the capital gain account scheme (CGAS) to secure your exemption under sections 54, 54F, and 54EC. However, this amount should be reinvested within two years of the sale otherwise, the exemption may be revoked,” Soni added.