Property Selling: Save Tax While Selling a House
Real estate is emerging as one good investment option, as the property price all over India has appreciated significantly in recent times. So, many people are investing in property to gain profit from reselling them. The ta on the capital gains booked from reselling the property is quite high and sometimes even consumes 50% of the capital gains.
If you sell your house with in the three year of purchase, the gains will be considered as Short Term Capital Gain (STCG) and will be added in your income and taxed as per your slab rates. There are no much benefits that one can avail in the short term gains. Though there is one implication regarding the home loan. If you have taken a home loan for the construction or purchase of the property and you sell the property before five years of purchase, the tax deduction benefit under the section 80C of Income Tax is reversed. The tax benefits on the principal payment and interest, which you have received so far, will then be included in your income when you file the tax return. In Case you have a home loan you should sale your property at least after 5 years of purchase to avoid reversal of tax redemption.
So to avail tax benefits and make the maximum out of the property, one should sell the property at least 3 years after the time of purchase. The capital gains after that are considered as Long Term Capital gains (LTCG). The LTCG are taxed at 20% with the indexation benefits.
Indexation is a process through which the value of the property is inflated. The central board of direct taxes issues a factor for every year. The factor is known as the Cost Inflation Index (CII) and tracks the increase in the general price level. The CII for the year of sale is divided by the CII for the year of purchase and the result is multiplied by the original price of the property. This mathematics will provide us the present value of the property or index purchase price. The tax is only accounted on the difference of the Selling price and Index Purchase price.
For eg. Anurag has bought a property in the year 2005-06, for Rs. 50 lakh and has sold it in the year 2012 for Rs. 90 lakh. Now to calculate the tax to be paid by him we will use the formula:
20% of the [(Price of sale) – {Original price X ( CII for the year 20011-2012 / CII for the year 2005-2006)}]
CII for the year 2005-2006 is 497
CII for the year 20011-2012 is 785
Original price is Rs. 50 lakh
Reselling price is Rs. 90 Lakh
Tax to be paid: 20 /100 [( 90,00,000)- {50,00,000 X (785/497)} = Rs. 2,20,000/-
This is how the indexation helps in slashing the tax burden for the seller.
One can claim the tax exemption in the case of LTCG ( Long Term Capital Gains) by following the ways given below:
- Under the section 54 (EC), you can save tax on long term capital gain by investing in bonds issued by entities like Rural Electrification Corporation (REC), National Housing Bank (NHB), and so on. The seller needs to invest the money within 6 months of selling the property and can invest only up to Rs. 50 lakh only in a financial year. The return on these bonds is around 6% with a lock-in of three and the income is taxable.
- Under Section 54 of the I-T Act; one can buy or construct a property for the value of capital gains. The property can be bought within two years of sale or one year prior to the sale. While in the case of construction of the property the time permissible is three years from the date of sale. For the time being the gains are required be deposited in a capital gains deposit account before the date for filing returns. The part utilization of the capital gain is possible since the underutilized amount of these capital gains will be charged to income tax in the ‘previous year’ at the end of the duration of three years. However to avail this benefit you should not own more than one house.
Also Read:
Know When to Invest in property !
Check list before investing on Commercial Property
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