Selling Your Apartment? Here’s How You Can Reduce Your Tax Burden

Upon the sale of a residential house property, the seller has to pay capital gains tax on the profit made on the sale. The tax treatment depends on whether the gains are classified as short-term or long-term.

Short-Term Capital Gains (STCG): If the house property was held for up to 24 months before selling, any such gains are considered as short-term capital gains (STCG). Such STCG would be taxed in accordance with the slab rates applicable to the taxpayer along with the applicable surcharge and cess.

Long-Term Capital Gains (LTCG): This would apply where the property in question is held for more than 24 months.

Says Aarti Raote, partner, Deloitte India: “The cost of acquisition for long-term assets (that are held for more than 24 months) can be inflated by indexation at the option of the seller for computing taxes on property purchased before July 23, 2024. Thus the seller has the option to pay tax at the rate of 12.5 per cent without indexation or at 20 per cent with indexation of the cost of acquisition as is beneficial to him.”

How To Save On Taxes

To save on capital gains taxes, the seller can invest the gains in certain specified assets and claim an exemption on the same.

Says Raote, “Of course, the investments are subject to certain conditions that have to be met by the seller.”

Section 54, Income-Tax Act, 1961

Section 54 of the Income-tax Act, 1961 provides that an individual taxpayer may claim tax exemption on LTCG arising from house property by way of investing the capital gains in one residential property in India.

“Such new house property should be purchased within a period of one year before or two years after the date of transfer of the old house or should be constructed within a period of three years from the date of transfer of the old house,” says Suresh Surana, a Mumbai-based chartered accountant.

It is pertinent to note that such exemption can be claimed only in respect of one residential house property purchased and/or constructed in India.

However, if such LTCG are up to Rs 2 crore, the taxpayer can avail of once-in-a-lifetime option of acquiring two house properties within the above time limit.

“Also, the new house property would be subjected to a lock-in of three years. If a taxpayer claiming exemption under Section 54 of the Act transfers the new house within three years from the date of its acquisition and/or completion of construction, then the benefit granted under the section will be withdrawn and accordingly, the cost of acquisition of the new assets would be reduced from the exempted capital gains,” adds Surana.

Section 54EC - Investment In Certain Specified Bonds

Incidentally, Section 54EC of the Income-tax Act, 1961 provides tax exemption to an individual or a Hindu Undivided Family (HUF) from LTCG from house property provided they invest such gains in certain specified bonds within six months from the date of transfer of house property.

One can invest in the following specified bonds (redeemable after five years) to claim exemption under Section 54EC of the Income-tax Act, 1961. These are:

• Rural Electrification Corporation Limited or REC bonds,

• National Highway Authority of India or NHAI bonds (Discontinued w.e.f. 31st March 2023),

• Power Finance Corporation Limited or PFC bonds,

• Indian Railway Finance Corporation Limited or IRFC bonds.

Adds Surana: “The aforementioned bonds would be subjected to a lock-in period of five years. In case the taxpayer availing exemption under Section 54EC transfers or converts such bonds into money within five years from the date of its acquisition, the exempted capital gains would be subject to tax in the year of transfer and/or conversion.”

The exemption is available up to lower of the amount of capital gains or investment in specified bonds (maximum investment amount restricted to Rs 50 lakh).