Selling a property has tax implications that sellers should be aware of to ensure compliance with the country's tax laws. Several factors contribute to the tax impact, including the holding period, property type, and the profit gained from the sale. Understanding these implications is crucial for effective tax planning.
“Capital gains arise as and when a capital asset is sold. Capital gains can be classified into long-term capital gains and short-term capital gains depending on the period for which an asset is held,” Abhishek Soni, CEO, Tax2Win, an income tax portal said. There are two types of capital gains.
Long-Term Capital Gains: If an asset is held for more than 36 months (in the case of immovable property), then it is considered a long-term capital gain.
Short-Term Capital Gain: If an asset is sold before completing the holding period of 36 months (in the case of immovable property), then it is known as a short-term capital gain.
Short-term capital gain is added to the individual’s total income and is subject to tax at the applicable slab rates. “Gain/loss from the sale of the asset is calculated by deducting the cost of purchase, cost incurred for improvement of the asset and expenses incurred exclusively in connection with the sale proceeds of the asset,” Avinash Polepally, Senior Director, ClearTax said.
And if your annual income exceeds Rs 10 lakh, then you might have to pay a 30 per cent tax on short-term capital gains. In addition to this, there are no additional benefits or tax exemptions available on short-term capital gains on the sale of property.
If the property is sold after three years of purchase, it leads to long-term capital gains, and it is taxed at a 20 per cent tax rate with an indexation benefit. “Long-term capital gains are calculated in the same way as short-term capital gains, but the purchase cost and cost of improvement are replaced with the indexed cost of acquisition and indexed cost of the improvement,” Polepally said.
“Individuals can add the expenses on repair and renovation to the cost of acquisition, thereby reducing the capital gains. Also, indexation benefits are available on these expenses,” Soni said.
If you use the entire capital gain to buy another property within two years or construct a property within three years, then you do not need to pay long-term capital gains taxes.
If all capital gains are not reinvested, the balance amount is charged to tax as long-term capital gains. However, if the newly purchased property is sold before three years, the entire capital gain tax exemption will be reversed and it will be treated as your income in the year of sale of property.
“You can also claim exemption on long-term capital gains under section 54EC by investing the amount in bonds of Rural Electrification Corporation Limited (RECL) and National Highway Authority of India (NHAI) within six months of sale. You can also invest the long-term capital gains in technology-driven start-ups (certified by the inter-ministerial board of certification),” Soni said.
Things To Know
It is important to note that long-term capital gains can be carried forward for eight years and also be set off against long-term loss caused by another asset. If you are unable to reinvest the long-term capital gains, you can park your funds in the CGAS (capital gains account scheme) account to claim the exemption. But, that amount should be used for the specified purpose within the specified time.
