How to save tax on long term capital gain from sale of house property

How to save tax on long term capital gain from sale of house property

How to save tax on long term capital gain from sale of house property

We all know that the real estate investment provides good returns over a long term. However during this process we should know how to save tax on long term capital gain from house property sale by looking at various options for tax exemptions.

What is long term capital gain from house property refers to?

If a house property is sold < 3 years from the date of purchase, then, it is short term capital gains. Property sold after 3 years (or 36 months) from date of purchase comes under the long term capital gains. The tax rate on long term capital gain is 20%.

How the long term capital gain from house property is calculated

Long term capital gain is not simply computing the difference between sale value minus purchase value. The value of money ten years back, say Rs 1,000 is not same as today. Hence while arriving capital gains on property sale, the indexation would be done. Indexation is done by computing the past value to present value considering cost inflation year on year. The cost inflation index (CII) needs to be referred to arrive at the present value of the past investments.

E.g. if you have purchased a house property in year 1995 for Rs 10 lakhs and sold for Rs 40 lakhs in 2012, the value of CII in 1995-96 was 281 and 2011-12 is 785. The present value after indexation is 10 lakhs x 785 / 281 = Rs 28 lakhs (approx). The long term capital gain on house property is the difference between the sale value i.e. Rs 40 lakhs minus Rs 28 lakhs = Rs 12 lakhs. Income tax on this would be 20% i.e. Rs. 12 lakhs x 20% = Rs 240,000

How to get exemption on long term capital gain from house property:

1) Buy a new property or construct a new house (Exemption as per Section 54)

If you have sold a house property and have a long term capital gain, you can get exemption by re-investing the amount in a new or another property from the sale proceeds.

  • The exemption can be sought by purchasing the new residential house within a period of one year prior to or two years after transfer of the original house.
  • In case of under construction house, the new construction of house needs to be completed within 3 years from the date of original transfer of house.

I feel this is one of the best methods of getting exemption for long term capital gain from house property sale

2) Open a CGAS

You can open capital gain account with any Government owned bank and deposit the capital gains in this account and file your income tax return before 31st July and save long term capital gain tax.

  • This method is generally used to park the money, till you find a new house.
  • Once you find a new house, withdraw this money and purchase the house any surplus remaining would attract long term capital gain tax.
  • However there is stipulated period for this. You need to buy a new house within 2 years or construct a house in 3 years from the date of transfer of property.

3) Save in 54 EC bonds

In case you are not investing in new property, there is another option to save tax is by investing in bonds as per section 54 EC. These bonds are issued by National Highway Authority of India and Rural Electrification Corporation Ltd. However use this as last option for exemption of long term capital gain from house property sale as the returns would be very low.

  • These bonds are issued for a minimum of Rs 10,000 and in multiples of Rs. 10,000 and the period of investment is 3 years.
  • The maximum amount that can be invested in a financial year is Rs 50 lakhs.
  • If you are investing part of your long term capital gains into these bonds, you would get exemption only to that extent and balance surplus amount would attract tax.
  • The coupon interest rates for such bonds are 6% annually.
  • If you withdraw such bonds before 3 years, you need to pay LTCG tax.

How to save tax on long term capital gain from house property sale

 

Conclusion: Thought investing in real estate is a good long term investment option, while you are selling your house property, try these exemptions to avoid tax for long term capital gains.

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Suresh
myinvestmentideas.com

Article by Suresh

Suresh KP i.e. me have written 500+ articles on this blog. I love doing analysis and identifying the Best investment options.

253 Comments

  1. JAYANT says:

    Can we split amount 50-50% in BOND & House?

  2. s. ramakrishnan says:

    Dear KPS.

    WE are planning to sell a land in my wifes name for 1.2 crore against the bought price of 2.1 laks in 1999. The LTGG computed on 20% basis is about 22.9 lakhs. Is this right? If we deposit in CGA in some bank for some time, can the balance be kept in bank FDs without any further taxation?. We are senior citizens and have two married children.
    Please clarify.
    Thanks and regards,
    Ramakrishnan

    • Suresh KP says:

      Hi Ramakrishna, The computation would be done based on indexation basis. Pls see this article about indexation. http://myinvestmentideas.com/2014/04/cost-inflation-index-table-upto-2013-14-complete-guide-on-cii-and-some-faqs/

      Coming to computation, Rs 2.1 L in 1999 would be Rs 5.61 L in 2014. Anything sold above this would be LTCG. You can save tax by investing in the methods I indicated in this article

  3. Sumati says:

    Hi,

    We have sold a land last year and invested money in the flat.
    Now we would like to buy a land in a society and construct on it.

    Can we buy the land now?

  4. Harjeet Singh says:

    1.Can I sell and buy two flats at different localities and save LTCG.

    2 If not,  can I save tax buying one flat with 50 % of longterm gain and rest in LTCG Bonds .

    3 If yes to S No 2, how much (max) can be invested in LTCG bonds.

  5. Vivek Singh says:

    Dear Suresh, 

    I boiught a flat in 2000 for Rs 6.5 lakhs. It has appreciated to about 65 lacs now. In 2012 I bought another flat for 1.2 Cr using housing loans of about 90 lacs. Now I want to sell my old house and reduce the loan. Will the sales proceeds from sale of old house attract Capital Gains Tax if they are used entirely for repaying the housing loan? If so how much would that be? 

    Please advise. 

    Best regards 

    Vivek

  6. karlton says:

    Dear Mr. Suresh,

    My Father has sold his flat this year 2014 (it was purchased in 1960) and the amount is put into LTCG account.
    We would like to purchase a flat jointly, with me(his son) as the first name and his name as a second.
    a) if he invest the full amount in this flat with both our name(mine first and then his) can he get tax benefit on the full amount, even if I have a NIL investment in this flat
    b) if he invest the full amount and I invest the balance part, can he still get tax benefit on his full amount
    c) is there a specific point in time or a minimum waiting period where he can gift his part to me and I would own the full flat without paying stamp duty + registration by means of a Gift

    Please advise

    Thanks

  7. sukhu says:

    please answer my qury as under

    *residential property is held by three -mother, daughter and grand son in a CHS jointly.all three are adults and  at the time of sale of the  said property-the sale proceed shall be devided among three-  how and who can avail LTCG benefit ? -whether all three can buy property out of share of sale proceeds &can avail LTCG benefit ? or whether all three can invest in bond upto 50 lakhs in each persons name out of sale proceeds & can avail LTCG benefit ?

  8. Anand says:

    To avoid Long Term Capital Gain Tax after selling a house, one has to purchase or construct a new house and offset the profit against the cost of the new house. Suppose one has purchased some land (as investment) with this profit and has no intention of staying there, should this new house, which should be constructed to avoid LTCG tax, be a pucca house with all permits and approvals in place? Can one construct a temporary structure at minimal cost in the new land to avoid LTCG tax? What's the criteria from the IT dept to ensure that a new house has actually been constructed?

  9. Rakesh says:

    I sold a flat in may 2013, with this money I bought another flat which I should get possession by Jan 2015. I already own 2 other residential properties.  Am I eligible for exemption from long term capital gains?

     

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