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. Hello
    My husband sold a property but bought a new one in my name…. Will he be entitled to claim Property gain tax exemption….?
    Many thanks

    1. Aanya, No. If the property is sold by an individual, he should buy the new property within the time frame or invest in capital gains scheme. Else he needs to pay tax.

  2. Hi Suresh,

    I have a similar question but would really appriciate if you could answer my queery:-

    "I have bought a flat in November 2011 (registration & all the formalities in Nov'11 itself) for Rs. 38,40,000/-, the possesion of the flat was given to me in June 2013. First query is when will the actual date start for my long term investment, is it the Nov'11 when i got my flat registered on my name or June'13 when I got the possession?

    Secondly, if it starts say Nov'11, and I sell it in Dec'14 after completing full 3 years say approx. for Rs. 62,00,000/-, what would the tax I need to pay to the government if I do not want to buy any other new property?.

    Please reply…

    Thanks a lot in advance…

    Sandeep

    1. Sandeep, You are asking for computaton of tax based on future value i.e. Dec-2014. We would not have indexation table for future years. Your date of purchase / registration would be date which needs to be counted. 

  3. Hello,

    I have sold an ancestral property at arnd 40 lacs and from that amount i purchased new property of rs 35 lac having my wife as first owner and me second owner. Does this invite the taxation on whole 40 lac as i have purchased property on wife name.? Please help.

    1. Avinash, You sold the property and you got the money. However you purchased new property in joint name i.e. your wife name and your name. You need to pay tax on differential amount i.e. Rs 5L

  4. is it necessary to reflect the capital gain from house property in income tax return,if so which form we have to use file the tax return.

    further,we have already invested the capital gain recveived from the 1st property in 1st year.

     

    Regards,

    Rao

  5. Hi Suresh,

    I had purchased a property in 2010 on joint names(Me & Wife) and sold it in 2013.  I have earned a some of Long term Capital Gain. I am not investing the net consideration in new property.

    My question is

    1> If the new property is on My Name only, will I be eligible to claim Exemption under section 54/F etc for the entire amount. Please note that in the new property, some part will be paid by my Wife.

    2> If the new property is again on Joint name, still are we eligible for 100% exemption on Capital Gains. ?

    Thanks

    REgards,

    Abhi

    1. Abhishek, Point no.1 – Yes. Since legally it is in your name, you can claim the exemption 2) Yes even this. Net, if your proceedings are used for new property irrespective whether it is jointor in your name you would get exemption as long as your new property value is higher than old property.

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