How to save tax while selling home? Real Estate Knowledge Initiatives!

How to save tax while selling house?

In today’s world buying and selling properties is part of an investment portfolio. While selling the property, saving capital gain tax is is one of the important aspect for the seller of property. Capital gain means the profit earned from sale of capital assets (Shares, Property and other capital assets). The taxes imposed by income tax department on capital gain are called as capitalgain tax.

If the capital gain is on sale of property asset which is in the possession of seller for less than two years duration then it is short term capital gain (STCG) else it falls in the purview of long term capital gain (LTCG).

If you want to completely avoid paying tax, you will have to reinvest the capital gain amount. Here’s how.

Buy or build a house:

You must purchase a new house from your capital gain proceeds, within two years of your selling your current property. If you like planning in advance, you could book a house a year before selling your current one, and set off all expenses that arise thence, against your capital gain. You can also build a house, but you must complete the construction within three years of the sale of the older property.

Capital Gains Account Scheme:

If you want to bide your time and do not want to hasten into an investment, you can invest the capital gains in a special Capital Gains Account Scheme (CGAS), with your bank, which serves to inform the taxman that you do plan to invest in a property, but at a later date. Deposits under CGAS are eligible to exemption from capital gains tax, but there are some conditions:

Such a deposit must be done before you file your income tax returns for the fiscal in which the sale has been completed.

This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.

Funds withdrawn have to be used within 60 days.

You will have to pay tax arising on the interest paid.

Specified bonds:

Another option, and one with some scope of returns, comes from specified bonds, such as bonds of the Rural Electrification Corp. Ltd and the National Highways Authority of India, within six months from the date of sale. Such bonds usually have a tenor of three years, and even pay a quarterly or half-yearly interest. Earlier, you could invest a maximum of Rs.50 lakh per financial year to reduce the capital gains tax, and if the six-month deadline extended into the next fiscal, you could invest another Rs.50 lakh over two succeeding financial years. However, this rule has changed, and will not be applicable from assessment year 2015-16. The exemption is now being restricted to Rs.50 lakh both in the year of transfer of the capital asset and in the subsequent year.

When you sell a house, you can make a capital gain but you may also bear the brunt of a capital loss, owing to adverse market conditions, or due to a distress sale. Such a loss, if it is short-term, can be set off against the capital gain from a short-term or long-term sale of any other asset such as gold or equity shares. However, a long-term capital loss cannot be set off against a short-term capital gain from any other asset.

It is also interesting to note that even when your building is being redeveloped, the resultant transfer of the property to the builder in the interim period is termed a sale, in the eyes of the income tax department. However, such a capital gain can be set off when you acquire the property back, in lieu of the extra cost you may have to bear. You can also ask the developer to provide extra space for such cost, thereby reducing the tax outgo.

You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo.

However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.

Hence, plan wisely and carefully to reduce your tax outgo.

Disclaimer: The article contains data collected from various sources & the use of same is at readers discretion.