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.

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.

Suresh
myinvestmentideas.com

• Vasant Lohokare

Hello Sir,

I have purchased a flat in March 2005 at 9laks and now (Nov 2014) sold it at cost of 30lacs.

I have booked new flat in Dec 2014 .Builder has promised agreemnet will happened before March 2015.But it didnt happened yet. As money will be demanded by builder at any time ,So I kept all this money in short term FDs.

Do I need to open Capital gain account and transfer all this money to there? If yes what should be last date for this?

Please advice so I will be not in trouble by Income tax departmnet.

• Nandita

I want to sell my property and construct a house on the first floor in my existing residence which has only a ground floor.
Can I avail a tax exemption by constructing just another floor instead of buying a new property﻿

• kamal

I purchased industrial property in Aug 2006 Rs19L now I want to sell that property but the problem is that market price of the property is about 2.5cr & circle rate of property about 3.7 Cr, if I sale property in 2.5cr is that safe?
& how much tax can I save by investing in tax free bonds

• Mahesh Aswaney

Kamal can u pl share the reply you may have received as I am in same boat .
Also pl advise if you completed transaction and can you please tell me details of your transaction and also details of your CA .
Many thanks . Mahesh Aswaney

• Suresh D R

I sold a house in May 2014 the same was purchased in 2003, a part of the money has been parked in Government Bonds, rest so far not invested, I would like to know whether the interest returns from the Government Bonds attracts Income Tax as personal earnings.

• Prashanth

sir
I have sold my 20 year building for 70 lakhs in the tear 2014 and took full amount in the form of cheque now whether this money attracts Income tax if yes please suggest some ideas how to come out of that