Long term capital gains

Q: Hi, I had bought a property in 1998 for Rs 1 lakh and now I wish to sell it for 50 lakh. I’m looking to buy two properties esch of 5 lakh one in hebbal and the other near electronic city. Kindly, suggest if my capital gains by selling my existing property will be included in the purchase of the new properties? What are the ways to minimize the capital gains?

Dilip Joshi, Bangalore

8th March 2013

Legal in Bangalore

properties in hebbal

new properties in electronic city

long term capital gain

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Replies (5)

You can avail tax exemption on sale of a house if the profit is invested in either bonds of the National Highways Authority of India and Rural Electrification Corporation Limited for three years. The investment has to take place within six months of realizing the profit. However, investment is allowed only up to Rs 50 lakh in a financial year. Usually the interest on these bonds is around 5-5.5%. Hence, few factors should always be kept in mind when you are going to buy or sell a property. While making profit by selling a house, you need to know which tax bracket you fall under when calculating capital gains tax and also whether or not indexation can save tax payable for you.

Bhaskaran, Bangalore

13th March 2013

Comment

You can claim tax exemption under Section 54 on the long-term capital gain on sale of a property. If you buy a house within two years or construct a house within three years with all the profit made of sale, then you can avail tax exemption. You can avail tax exemption if you had bought a second house within a year before selling the first house. Further, you can avail tax exemption under Section 54 (F), too. For this, you need to own not more than one house and invest sale proceeds from assets other than a house in real estate. Real estate investment in India must be made in residential properties, not in commercial properties or vacant plot, in order to avail tax exemption.

vin, Bangalore

12th March 2013

Comment

In case of long term gains, i.e. the property being sold after 3 years, tax is calculated as per indexation. Indexation involves cost inflation index on the basis of which cost of acquisition of the property is recalculated. As the inflation factor is taken into account, cost of the asset is increased and gains is reduced. Hence the tax payer gets benefited from indexation. Indexation rates are notified for every financial year by the government. The indexed cost is calculated as per the following rule:
Indexed cost = original cost x (indexation rate for year of sale/indexation rate for the year of purchase)
Long term capital gains are calculated as: Capital gains = Sale price – Indexed cost
Indexation is included in determining profit in case of long term capital gains. As the tax payer is able to inflate the cost of his/her assets, it is advisable to hold the asset for more than 3 years, so that you can lessen the tax as compared to short term gains.

Ravindra Singh,

12th March 2013

Comment

Can you please tell me what is indexation?

Dilip Joshi, Bangalore

11th March 2013

Comment

You will be subjected to long-term capital gains tax taxed at 20 percent of the capital gains after indexation. For availing the tax exemption, you should have either invested in a new house within one year before or should do so two years after the sale date of the old residential property. Alternatively, you could construct a new house, the construction of which needs to be completed within three years from the sale date. Only one site though will be considered for deduction of capital gains. You may invest the remaining part of your money in REC bonds to save on tax. The maximum amount invertible is Rs 50 lakhs in any one financial year.

Gajendra V, Bangalore

11th March 2013

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