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

Suresh KP

264 comments

  1. Hi,i have purchased a house in june 2011 and sell after two year i.e june 2013.i purchased it Rs 23 lakhs from which i take loan of 18 lakhs.i pay 5 lakhs to bank in this two year.20000 per month.now i sold that house in 44 lakhs.Is it long term capital gain or Short term capital Gain. and how can i save tax from that.i want to buy new house.plz reply

    1. Tajinder, Please read the article completely. Options to save tax have already been specified in this article. Please deposit your sale proceeds in capital gain bank account and use them for purchase of new house property. If the value of new house is lower than the sale price of old property, you can save tax.

  2. Hi  Suresh,

    I am about to sell a land for about 22 Lakhs in July 2013.   I had earlier purchased a house for Rs 55 lakhs during the month of september 2012.  The capital gains for the above land (that is planned to be sold), comes to about 13 lakhs.

    My questions is, can I get capital gain tax benefit for this land sale , by showing the house purchase I did with in one year to this sale ?

    How to go about doing this (declaring my capital gain tax saving on account of my earlier house purchase) ?   Do I need to take the help of an auditor ?

     

    thanks,

    regards,

    sampath

    1. Sampath, You should deposit your sale proceeds in capital gain account in a bank and utilise the same for sale proceeds of new house. This way, you can avoid and save tax. Talk to your auditor with date of purchase of new house and date of sale of old house.

  3. Hi suresh,

    i purchased a plot in 2008 for 9 lakhs.in 2012 we gave that plot for Development  to construct apartment.after constructing 3 slabs now the development people stoped the construction coz lack of money.so i want to sell the plot with construction for 65 lakhs.so please give me the suggestion to exempted from tax.till now i dont know anthing abt this tax.please give me the clarification.please mail me.i wanna talk to u once.give me your number.

    1. Venkat, Your plot cost + development cost, please add it up. Check the indexed amount (2008 for plot cost and 2012 for development cost). If you want to sell for Rs 65 lakhs, see the indexed amount of 2008-plot cost + 2012 dev cost with today’s value. If the amount is higher than Rs 65 L, you need to pay tax on difference. Alternatively you can deposit the proceeds of sales in capital gains account and buy another property. You can avoid the tax.

  4. Hi Suresh,

    good article about long term capital gains.

     I have purchased flat at cost of 30 lakhs around 2 years back but flat registration happened on 1 year back and i am planning to sell it to 40 lakhs and flat is still under construction. so how much tax do I need to pay on this? if I plan to buy another flat with that profit within 1 year, in this case do I need to pay tax?

    it would be good if you have any article on short term capital gains.

    Thanks in advance.

     

    1. Hi Sushant, You have not specified the years. I am assuming that you purchased in 2011-12 year and registered in 2012-13 and now want to sell in 2013-14. However since the registration happened only in 2012-13, this would get counted. The CII index was 852 in last year and current year is 939. Means your Rs 30 lakhs flat could have been 33Lakhs. If you sell for Rs 40L, your capital gain would be Rs 7 lakhs. You can deposit your sale proceeds in capital gain account with any bank and buy other flat/house. In case you buy for lower amount. that would become capital gain and you need to pay tax.  Regd Shor term capital gains, sure, I would do that in next 2-3 weeks.

  5. Hi Suresh,

    Plot purchase value in 2007 is Rs. 5 lacs and the selling cost now is Rs. 30 Lacs. If i sell this plot and buy another plot, will capital gain tax be applicable as it is plot and im not planning for construction in next 3 years. kindly reply

    1. Sharath, When you sell the plot and intend to buy a residential property or purchase a plot but need to construct within 3 years, the amount should be deposited in capital gain tax account in any bank. If you are just buying a plot and not construction, it would be deemed as capital gain and 20% tax would get deducted after cost inflation index is applied. 

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