Finding a right buyer for your property is such an enormous task in itself. Top it up with endless trail of paperwork, visits to registrar’s office, calling on yours and the buyer’s bank, and, a host of other formalities to finally seal the deal. But the stress doesn’t end here, selling a property also invites a special category of tax called- Capital Gains Tax.
The eight points below tell you everything you need to know about the nature, levy and ways to save this tax.
1) As the name suggests, this tax is on capital gains or profits earned on selling the property. It is essentially the differential between your sale price and the price at which you bought it plus cost of any renovation and the transfer costs.
2) Two categories of capital gains tax exist depending on the duration for which the property was held- Short Term and Long Term.
3) Short Term Capital Gain- The profit made on selling property within 3 years of purchase is termed as short term capital gain and is taxed as per your income tax slab. For instance, if your income exceeds Rs 10 lakhs, 30% of your profit will be straight awaywiped off.
4) Long Term Capital Gain- If you hold on to your property for more than 36 months, any gain arising from sale of that property will be termed as long term capital gain and will attract a flat tax rate of 20%.
5) How to calculate capital gain- The true value of the profit from sale of a property is calculated using Indexation method and the tax is then paid on that sum. Sounds complicated? It’s actually rather simple. Suppose, you bought a property in 1990 for Rs 20 lakh and sold it in 2016 for Rs 3 crore. You have made a profit of Rs 2.80 crore and will have to tax pay on it? Wrong. The Cost Inflation Index will help find the present value of Rs 20 lakh spent on buying the property in 1990 and this will automatically shrink your net gain and the resultant tax liability.
6) Inherited or gifted property- In case the property you are selling has been inherited or gifted to you, the capital gain (and indexation) will be computed based on the acquisition cost of the original owner and not on the notional value when it was transferred in your name.
7) How to save tax
- You can claim deductions on short term capital gain under Section 80C to 80U of the Income Tax Act
- Exemptions for long term capital gain is available under Section 54 of the Income Tax Act
8) Section 54- This provisions says that you will have to reinvest the capital gain amount if you want to save tax. Here’s how you can do it
- Buy/construct a new residential house property
- The new residential property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
- Or the new residential house property must be constructed within 3 years of sale of the property/asset
- If you are not able to invest the specified amount in the above stated manner then deposit the specified amount in a public sector bank (or other banks as per the Capital Gains Account Scheme, 1988).
- Capital Gains Tax can also be saved by investing the sale proceeds in Capital Gain Bonds
Other important points to note
- Remember, only ONE property can be purchased or constructed from the proceeds and it has to be residential property
- It is also mandatory that this new residential property must be situated in India.
- A very important point to note is that the property must be bought in the name of the seller and not on anybody else’s name.
- Relief is that if the builder fails to hand over the property to the taxpayer within 3 years of purchase, the exemption is still allowed.
- In case there is a capital loss, it can be set off against capital gain in that year or can be carried forward for next 8 years.