Buying a house is not only about choosing the right location or setting a budget for your purchase. More than the stress of the buying process, a lot more goes into the legalities and paperwork that follow, especially with the rules set by the government. However, selling a property is a lot more complicated process. There are quite a few intricacies one must learn to ensure they have made a proper transfer of name and taxes on the sale of the home as well. One of the most important things that are absolutely necessary to learn is a thing or two about capital gains.
Tax law is not the easiest thing to learn; nevertheless, this article further aims to give you an in-depth understanding that can help you make better decisions while selling your property. There are a ton of misconceptions about how to save tax and how you get taxed on the profit from the same. In addition to that, there have been certain changes in the law regarding this, which makes it even harder to comply with. Keep reading to understand what you need to know about how to avoid capital gains tax on real estate.
What are Capital Gains and its history?
Before anything, you need to understand what capitals gains exactly is. Essentially, it is the tax you have to pay on the proceeds from the sale of the house. The formula for calculating this is easy and quite simple. Namely, the sales price deducted from the purchase price is your overall gain on the sale of the home. Under the income-Tax Act of 1961, you are liable to pay an income tax on selling a house.
The Holding Period for Capital Gains
Profits arising from such capital assets like land, property, equities, bonds and so on can further be classified into two basic categories, namely Long-term Capital Gain (LTGC) or Short-term Capital Gains (STCG). Which categories your taxes fall in solely depend on the time period the asset has been held.
Usually, if a capital asset like a property is with you for less than 36 months, all the profits from this will be considered as short term capital gains tax India, and otherwise, it is long-term. The most recent laws set by the government in the term 2917-2018 have, however, changed the time period. Now any immovable property, mainly residential property, land or building, is liable for capital gains tax India only after 24 months, contrary to the 36 months earlier.
Rate of Taxation
The rate of taxation on capital gains mainly depends on two things in India, firstly the kind of asset in question and secondly, how long it has been in possession of the seller. While Short-term Capital Gains are mainly taxed on the specific individual Income-Tax slab rate, Long-term Capital Gains tax on selling property is somewhat different. It is equal for every owner and is set at a 23% mark.
That said, there is a simple way that helps you in avoiding capital gains tax on home sale under the Section 54 EC of the Indian constitution. Further mentioned below is more information on the same.
Exemptions that fall under Section 54 EC on buying of specific bonds
Under this law, any gains that arise from the transfer or sale of a long-term asset is said to be exempted. However, it is only true in the case of home sale proceeds tax if the taxpayer has already invested the gain amount (considered to be a maximum of 50 Lakhs in India) within a stipulated time of 6 months. The 6 months are calculated from the transfer date mentioned in the long-term bonds supplied by the government.
Now that you know, you can easily avoid taxes on home sales; you are wondering what to do with house sale proceeds. However, there are only certain specific bonds in which reinvesting capital gains from real estate can allow your long term capital gains tax India to be exempted.
These are some bonds that get issued either by the Rural Electrification Corporation Ltd (REC) or the National Authority of India (NHAI). That said, there are some subtle differences between each. While the bonds issued by NHAI can provide you with an interest rate of 6.25% annually, the REC bonds carry lower interests at 5.75% annually. The payable dates are also different, with the NHAI bonds at 11th March of each year, the REC bonds are later on the 30th June of each year.
While the interests earned from these bonds are totally taxable as ‘Income from Other Sources’, there is no tax at source being deducted from the interests on these bonds.
The amount exempted is lower than the following:
- The total amount of capital gains received from the sale of the property.
- The total amount invested in the bonds mentioned.
However, you must remember that the bonds have to be in possession at least 3 years from the date of purchase. If, in any case, they are transferred, sold, or redeemed before that, the earlier amount of capital gains exempt is totally taxable. This falls under the denomination of ‘Capital Gains’. If you advance or loan any money on the security of the bonds, they will be considered to be redeemed and will hence lose its value.
On the contrary, if, by any chance, the said individual is not able to invest in the bonds before filing for taxation the same year, they can deposit the same amount in any PSU bank or one that is listed under the 1998 Capital Gains Account Scheme. Such a situation allows the exemption on the sale of residential property capital gain tax as legitimate.
However, any such deposit has to be transferred to an investment within 2 years of sale. Failing to do so can and will be considered as a short-term capital gain for the year of lapse.
What are some benefits of Indexation on Capital Gains on the sale of a property?
In the case of LTCG, the cost of alteration and total cost of acquisition is tallied and adjusted against inflation. Indexation mainly helps in better assessing the said capital gain tax from the sale of a property. If this was not applied, the profit would get inflated, further asking for more tax to be paid. This kind of indexation number is also known as Cost Inflation Index or CII.
For instance, if a property owner sells their asset, in this case, the property for a crore in April 2018, and it was acquired at 25 Lakhs in May 2005, considering no renovation has been done, the indexed cost of this house in the year of selling will be tallied with the current inflation and calculated accordingly.
Points that a property seller must keep in mind
Now that you are well-versed with the basic rules of capital gains taxations and how to avoid short term capital gains tax in India legally, it is time to learn the basics of selling a property in India. Although it might seem like a simple process, there are several intricacies that need to be kept in mind. Further mentioned here are some of the same.
Read the deed of transfer very carefully.
Make sure the clients know what they are buying properly
If necessary, show what you paid and how you did so
To sum up
With the information mentioned here, you will surely be able to understand the selling process of your property a lot better and be more skilful with it. Hopefully, this article has given you an insight into how you should use your capital gains in order to avoid paying taxes on them.
However, if you are having any difficulties with the intricacies of the matter, it is best to hire legal help for the same. They are experienced professionals who know the legal as well as the property world and can efficiently guide and assist you in making a better decision. Rest assured, with this article; you can significantly better the use of your capital gains.
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Frequently Asked Questions (FAQ’s)
How can I avoid paying taxes on property sales?
If you want to know how do I avoid capital gains tax on property, this answer is ideal for you. The government of India has been kind enough to provide quite a few legal ways to avoid paying gain tax on the sale of your property. However, there are three main requirements you need to keep in mind in order to take advantage of such exemptions:
You have to have owned and lived in the house for at two years in the five years after which you are looking to sell.
It should be registered as your primary residence for at least 2 years of the same five year time period.
You have not taken the gains from any other property to invest in the one you are looking to sell at least 2 years before you plan the current sale.
Do you have to pay taxes on proceeds from home sales?
If you are wondering do you pay taxes on the sale of a house, the single-worded answer is yes; you are liable to pay the government a nominal rate of tax on the capital gains of selling the previous house. However, there are certain legal steps you can take to avoid paying high amounts of taxes, which are mentioned in the article.
How can one save capital gains on a residential property sale in 2019?
As per Section 54, one of the best ways to save capital gains on the sale of any residential property in 2019 is by reinvesting the same money to buy another residential property. Certain other conditions to how to avoid capital gains tax on house include:
1. Buy the new property after 2 years of the transfer date
2. Only after 3 years of the sale construct the new property
3. Buy the new property within 1 year of the selling date
Can I reinvest capital gains to avoid taxes?
If you are utilizing your entire sales proceeds for a new house and wondering how to avoid capital gains tax when selling a house, there are some legal ways you can do that. Some of them are mentioned here.
1. Purchase another house either within the same year or two years after the completion of the transfer
2. Only construct a new house after the third year of the transfer
3. Do not sell the house before 3 years of construction or purchase
The new house you are planning to buy should be located in the same country (India in this case)
4. You should not own more than 1 residential property before the transfer has been completed
5. Constructor purchase the next house only after 2 years from the date of transfer; otherwise, you can face a tax penalty for selling house before 2 years
