Whenever you sell an asset you have to pay tax on it, which is called capital gain and any asset sold after at least two years comes under long term capital gain. Long-term capital gains are taxed at a flat rate of 20 per cent.
Indexation is basically a technique of adjusting the cost of an asset as per the inflation index. This will increase your cost and reduce your profit and thus tax liability.
According to Cleartax, “Therefore under long term capital assets, the benefit of indexation is available and a person who is in the tax bracket of 30% also gets the benefit of paying a lower tax rate of 20%.”
Ankit Jain, Partner, Ved Jain & Associates. Explains several ways to save capital gains tax on property sales.
Take advantage of indexation benefits: An effective way to reduce tax on the sale of residential property is by availing indexation benefits. Indexation adjusts the purchase cost of a property to take into account inflation. This effectively reduces the amount of capital gains and the subsequent tax thereon.
For property owners to avail this benefit, they must hold the property for at least two years, as this benefit is available only for long-term capital gains.
To reduce capital gains tax on selling a home, you can live in the home for more than two years and keep receipts for all expenses incurred on enhancements or renovations. These expenses can be added to the cost of the home and can help reduce the taxable capital gains amount.
4. Purchase of new property (Exemption under section 54): One of the most popular ways to save tax on the sale of a residential property is by reinvesting the capital gains in another residential property.
Buy a new property one year before or two years after the sale.
Alternatively, construct a new property within three years after the sale. If you book the flat with the builder, please ensure that the completion date of the flat is within a period of three years.
Long-term capital gains for individuals and Hindu undivided families on sale of house property are exempt from taxation (under section 54 of the Income-tax Act, 1961) if:
- Capital gains are used to buy or construct a second house.
- The new house is bought one year before or two years after the sale of the old house.
- The new house was built within three years of the sale of the old house.
- Only one additional house property is purchased/constructed.
- The property being purchased/developed is within the national boundaries of India.
- You do not sell the new house for three years after taking possession of it.
- If the cost of the new asset is less than the sale amount, then the rebate is applicable only proportionately. The remaining money can be reinvested within six months under section 54EC.
For example, in case of section 54, if a person made a long-term gain of Rs 5 crore from selling a house and spent Rs 3 crore on a new house, an additional Rs 2 crore goes into the capital gains account scheme. “The total discount will be Rs 5 crore,” said Pallav Pradyuman Narang, partner, CNK.
5. Buy new residential property (Exemption under section 54F): In cases where you sell an asset other than a residential property, but use the proceeds to acquire a new residential property, you can claim exemption.
The new house should be purchased either one year before the sale or two years after the sale, or it should be constructed within a period of three years after the sale.
– To be fully exempt, the entire sale proceeds must be reinvested. If only capital gains are utilised, then exemption is given proportionately.
At the time of claiming this exemption, the seller should not own more than one residential property except newly acquired property.
Suppose Mr. A is making long term capital gain of Rs.30 lakh on sale of his flat. He is planning to invest the profits from this in bonds issued by NHAI. So, the capital gain can be invested in bonds issued by NHAI and claimed as exemption and the entire capital gain of Rs 30 lakh will be exempted.
8. Invest capital gains in Capital Gains Account Scheme (CGAS) – If you are not able to buy or construct a suitable house or find suitable bonds, you can invest in CGAS of public sector banks for that assessment year. While filing income tax return, you can claim exemption for money in CGAS. However, the amount deposited in CGAS must be used within 3 years, else you will have to pay tax on that amount.
9. Reinvest profits in shares of a company engaged in manufacturing
According to Narang, there is also a relatively lesser-known provision, section 54GB, wherein any person can reinvest long-term capital gains from the sale of a residential property in the shares of an eligible company that is engaged in manufacturing activities. The limit for such reinvestment is Rs 50 lakh, provided the investor holds more than 25% of the voting rights or 25% of the post money share capital in the Indian MSME company.