How to Save Capital Gains Tax on a Property Sale?

While some acquire properties mainly as permanent residences for their families, others invest in real estate for profitable returns.

Now, properties are considered capital assets; any profit gained from their sale is classified as capital gains, a taxable income.

So, for someone planning to invest in real estate and properties, a clear understanding of how to save capital gain tax is vital. It will help the investor do effective tax planning and minimise the amount of capital gain tax on a property.

What is Capital Gain Tax on a Property Sale?

The profit from selling a capital asset, such as a real estate property, is referred to as a capital gain.

This gain is counted as one’s income for tax purposes; therefore, one must pay taxes in the year when the sale transaction is completed.

The tax payment associated with capital gains is known as capital gain tax.

How to Calculate Capital Gain on Property?

A capital gain tax can be classified as either short-term or long-term, depending on the duration of asset ownership.

Selling one’s land, house, or property within 36 months (3 years) of acquiring it is a short-term capital gain. To calculate the short-term capital gain tax on property, follow this formula:

Selling it after 36 months (3 years) is a long-term capital gain. For calculating the long-term capital gain tax on property, use the following formula:

• Indexed Cost of Acquisition = Cost of Acquisition x (Cost Inflation Index of the Year of Transfer / Cost Inflation Index of the Year of Acquisition).
• Indexed Cost of Home Renovation = Cost of Renovation x (Cost Inflation Index of the Year of transfer / Cost Inflation Index of the Year of Renovation).

How to Save Tax on Capital Gains?

If an individual is wondering how to save tax on the sale of property, several strategies may be considered.

• Section 54: Buy or Build a Residential Property

  A person can qualify for a tax exemption under Section 54 if one reinvests the capital gains into buying or building another house. According to Section 54 of the Income Tax Act, 1961, a person who sells a residential property can benefit from a tax exemption of up to ₹10 crores on long-term capital gains. The following criteria MUST be met to be eligible for exemptions under Section 54:

  • The property must be a residential house and qualify as long-term capital gains.
  • The seller must purchase a new house within 2 years after selling the old property or within 1 year before selling the old property. In the case of construction, a 3-year timeframe is allowed.
  • The new house purchased should be located in India.

• Section 54EC: Invest the Profits into Capital Gain Bonds

  To claim deductions, one can reinvest the profits from selling the property into specific bonds. Under Section 54EC, if the profits from the sale of land and buildings are reinvested in certain specified bonds within six months from the date of sale, long-term capital gains (LTCG) can be exempted. These Section 54EC-specified bonds are issued by entities such as the Railway Finance Corporation, the National Highways Authority of India, and the Rural Electrification Corporation. The maximum investment limit for these bonds is ₹50 lakhs, and they come with a lock-in period of five years. Note: This exemption under Section 54EC applies to both residential and non-residential properties being sold.

• Add the Profits into a Designated Capital Gains Account

  If one cannot buy a suitable house, construct one, or find an appropriate bond, one can invest in the Capital Gains Accounts Scheme (CGAS) public banks offer for the relevant assessment year. By doing so, one can claim exemptions for tax on selling property in India on the funds deposited in CGAS when filing income tax returns. Note: The amount must remain in the bank for three years; otherwise, the deposit will be treated as capital gains, and the tax will be paid in the subsequent financial year.

Conclusion

Real estate is subject to many income tax provisions throughout the process, starting from purchase, maintenance, and property sale.

One must grasp the taxation rules related to real estate transactions. This understanding enables them to plan their taxes effectively and save money.

When searching for a residential property to minimise capital gains tax, one may explore the available options provided by Piramal Realty. This premier Indian realty company offers a raft of an extensive selection of housing properties in prime locations in Mumbai!

Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.