How to save tax on the sale of a house

Several provisions in the Income Tax Act, enable you to reduce or avoid paying tax on the gains accrued from the sale of a house

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Is this a Long Term Capital Asset or Short Term?

When you make a gain on the sale of a house, you have to pay a tax on your gains. If three years have passed, between the date of purchase and sale of an asset, then, your gain from the sale will be classified as a long-term capital gain. If three years have not elapsed, your gain will be treated as a short-term capital gain. Long-term capital gain is taxed at the rate of 20%, while short-term capital gain is taxed at your marginal tax rate.

What are the Tax Rates

STCG are included in your taxable income and taxed at applicable tax rates basis your slab.
LTCG are taxed at 20% with indexation

   

Indexation benefits

You are entitled to avail of indexation benefit on long-term capital gains. If you bought a property in 1994-95 at Rs 20 lakhs and sold it in 2015-16 for Rs 1 crore, your long-term capital gain will not be Rs 80 lakh. Instead, it will be calculated as follows:
Capital gain = Selling price – Indexed cost of acquisition.
Indexed cost of acquisition = Purchase price x (Index in year of sale/Index in year of purchase).
Now, the index in 1994-95 stood at 259 and in 2015-16 at 1,081.
Hence, your indexed cost of acquisition will be = 20 x (1081/259) = 83.48
Your long-term capital gain will be = 100 – 83.48 = 16.52 lakh.
 

Reinvesting in a property

Under Section 54 of the Income Tax Act, you don’t have to pay any tax on long-term capital gains, if you invest your gain in another property. However, there are a few preconditions.

• Firstly, this benefit is available only to an individual or an HUF (Hindu United Family). 
• Secondly, your gain must be invested in another residential property and not in some other asset. 
• Thirdly, you must invest in the second property, either one year before or within two years of the sale of the first property. If you are constructing a new house, its construction must be completed within three years from the date of sale of the first property.
•  Lastly, the government has now restricted this exemption to only one residential property.

“You can’t avail of the exemption under Section 54, if you sell your house after holding it for less than three years,” cautions Jatin Khemani, managing director of New Delhi-based Stalwart Advisors. Moreover, the amount that is eligible for exemption will be the lower of the two – the capital gain arising from sale of the first property, or the amount invested in the second property.

If you avail of the benefit under Section 54, you can’t sell the second house within three years from the date of its purchase or from the date of completion of its construction. “If you sell the house in less than three years, then, the amount claimed as exemption under Section 54 will be deducted from the cost of acquisition of the new house,” explains Manish Saluja, a New Delhi-based certified financial planner.

See Also: Long-term capital gains tax: Exemption on buying multiple houses

By Investing in Capital Gains Account Scheme

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is a time consuming process. Fortunately, the Income Tax agrees with these limitations. If you have not been able to invest your capital gains until the date of filing of income tax return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.

Invest in specified bonds

Section 54EC also provides for exemption on capital gains tax, if the amount is invested in the bonds of Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI). The investment must be made within six months of sale of the property. One can invest up to Rs 50 lakhs in these bonds, which have a tenure of three years.

In order to widen the scope of this clause, the government, in its Finance Bill 2017, proposed that such investments can be done in any bond redeemable after three years, which has been notified by the central government in this behalf. Such investments will also be eligible for exemption. However, this amendment will take effect from April 1, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years

Disclaimer: All Information has taken from Cleartax.in and housing.com
                     For Tax Calculation please take advise from Tax Consultant.NuEdge Corporate will not provide any Tax Consultancy.This has given for information purpose only.