A sale of property or any other asset, such as gold, jewellery, or shares, involves tax implications.
The profit from such a sale is called capital gain, and it is categorised as either long-term capital gains or short-term capital gains, depending on the period of holding.
Says Aarti Raote, partner, Deloitte India: “The capital gains tax on sale of property would differ depending on the holding period of the property. If the property is held for more than 36 months, the tax rate would be 20 per cent, plus the applicable surcharge. For property held for less than 36 months, the tax rates as applicable to the taxpayers’ income slab would apply.”
That said, there are several ways in which one can save on capital gains tax. Here are few things to keep in mind on sale of property.
How to save capital gains tax: One can save on capital gains tax on the sale proceeds from property transfer if he invests the gains in another house property in India within a period of one year or two years post the transfer of the first property, or constructs a new property within three years of the sale. There are similar provisions where the taxpayer sells any other long-term capital asset and invests in house property. The taxpayer should ensure that he meets all the required conditions for availing of the tax exemption.
Alternatively, if the taxpayer has some capital losses, the same can be used to set off against the capital gain subject to certain conditions.
One can also avert long-term capital gains tax by investing the capital gains in 54EC bonds or capital gains bonds issued by corporations like Rural Electrification Corporation, National Highway Authority of India, and so on. The capital gains must originate from the sales of assets, such as land or buildings or both, and the investment amount should not be more than Rs 50 lakh. Such bonds give a return of 5-6 per cent per annum.
Things to keep in mind: Check out whether the asset being sold is a long-term asset or a short-term one. In many cases, waiting a bit longer can help get you beneficial tax rates as well as indexation.
Also, tax on capital gains is payable in the immediately subsequent advance tax instalment, or else interest is levied. If the taxpayer seeks to invest the proceeds in another asset to avail of the exemption, till such time the funds are not utilised, the same is required to be deposited in Capital Gains Deposit Scheme specified in Section 54 and 54F of the Income-tax Act, 1961, before the due date of filing of the tax return.
In case of purchase of new property to avail of exemption, it is ideal to ensure that the purchase is completed in two years and the registration, title, and possession are obtained to avoid any possibility of litigation. If the taxpayer wants to invest in multiple properties, it is ideal to check whether all conditions are met, else the exemption may be denied.