3 easy ways to save Tax on Property Sale
The Assets which create Capital are Capital Assets, it can be immovable or movable assets commonly termed as property, they use to generate good Capital Gains in long term. If they generate Income through Capital Gains then obviously there will be Tax on this Income but this Tax can be minimise whenever you do Property Sale transaction. It is very important to understand this Taxation on Property sale and its Tax planning. So let’s understand it in detail-
What are Capital Assets– As per Income Tax department, any kind of property held by an individual, whether it is connected to or not with his/her profession. The capital assets are Land, Building, Plot, House property, Shares, Mutual funds, Bonds, Debentures, Patents, Trademarks, Leasehold rights, Jewellery etc. A very important exclusion in Capital assets is Rural Agricultural land.
Whenever you sell this property and make profit, it is called Capital Gains. The tax on Capital Gains is Capital Gains Tax. Capital Gains Tax is of 2 types- Short Term Capital Gains (STCG) Tax and Long Term Capital Gains (LTCG) Tax.
Capital Gains Tax on Residential Property-
| STCG Tax | LTCG Tax | |
| Time | Less than 24 months | More than 24 months |
| Tax Rate | As per Income Tax slab | Flat 20% |
| Indexation Benefit | No | Yes |
| Exemption | No | Yes |
You can notice STCG bear more Tax than LTCG and it has no exemption at all. It is recommended that if you purchase a Residential property you should posses it atleast for 2 years in order to take Tax benefits of Long term.
If hold any property whether residential or non residential for long term and then sell it, you can save hefty Tax on it if you do proper Tax planning. Income Tax department has provided 3 sections which help individuals to save Tax on property Sale following certain conditions. These sections are:
- SECTION 54:
This clause only designed for Residential property. According to Section 54, any Individual or HUF (Hindu Undivided Family) is shifting his residence and moving to some other Residential property can avail benefits of this Section. If you are moving to your new House property and sold the older one then Capital Gains Tax on this Sale will be completely exempted under following conditions:
First, You should buy the Residential property (Not land, commercial property etc.) with the Capital Gains of your existing Residential property sale. These benefits can be applied upto 2 House properties (you can take benefit on purchase of one or two House properties)
Second, The Sale of old property must be in Long term means you needs to hold existing House property atleast for 2 years before selling it.
Third, You have to purchase new property not more than one year before or 2 years after the sale of your existing property. If you are constructing the new property then it should be completed within 3 years from Sale of your old property.
Fourth, The maximum Capital Gains is exempted upto Rs. 2 crore and only Capital Gains (not whole Sale proceed) is considered for investment for Tax purpose. For example: You have your existing house which you purchase 10 years back for Rs. 1 crore and now you have sold it at Rs. 5 crores. Your Capital Gains will be of Rs. 4 crores, only this Rs. 4 crores Capital Gains will be Taxable and now suppose if you purchase a new House of Rs. 3 crores, you can avail benefit of section 54 and get exemption of Maximum limit of Rs. 2 crore. In this case, You have to pay Tax on your next Rs. 2 crores as LTCG Tax of 20% i.e. 40 Lakhs.
Fifth, You have to keep your Capital Gains in Capital Gains Account Scheme, if you need some time after selling your existing property and before purchasing new property. If you keep this money in your saving or any other account you will not get any exemption.
Sixth, This benefit is applicable ONCE IN LIFETIME and exemption is reversed if you sell new property within 3 years of purchase or construction.
- SECTION 54EC:
This clause is applicable for all Capital Assets like Shares, Bonds, Mutual Funds, House property, Commercial property, Plot, Land, Buildings, Gold, diamond, jewellery etc. The Section 54EC can be claimed by any Tax payer. If you have sold your Capital Asset and have generated Capital Gains; Tax on this Capital Gains will be exempted under following conditions:
First, The Holding period of the Capital Asset that you are selling should be MORE THAN 36 months.
Second, You have to invest your Capital Gains (not whole Sale proceed) in any of the 4 GOI backed Bonds for minimum 5 years of Lock-in period. These Bonds has Fixed returns of around 5.5% (returns are taxable as per Income tax slab) with zero risk. These specified Bonds are as follows-
- Rural Electrification Corporation Limited or REC bonds
- National Highway Authority of India or NHAI bonds
- Power Finance Corporation Limited or PFC bonds
- Indian Railway Finance Corporation Limited or IRFC bonds.
Third, the investment should be done within 6 months of Sale of Capital Assets and Maximum Capital Gains for exemptions is 50 Lakhs. After 50 Lakhs, your Capital Gains will be taxable whether you invest in above Bonds or not.
Since the returns of these Bonds are at lower side and that too are Taxable. It is recommended that you should consider Section 54EC when you are going to put these Capital Gains in other Assets like FDs or going to use in your expenses later. If it is not the case, you can pay Tax and invest in these Capital Gains in some Good return generating assets.
- SECTION 54F:
This Section is similar to Section 54, with the difference that you can claim Tax exemption on Capital Gains of NON-Residential property like Commercial property, Plot, Shares, Bonds, Mutual Funds, etc. The exemption is provided in following conditions-
First, You should buy new only Residential property (Not land, commercial property etc.) with the Capital Gains of your existing property sale and you should NOT possess more than 1 House property before purchasing this new House property.
Second, You have to purchase new property not more than one year before or 2 years after sale of your existing property. If you are constructing the new property then it should completed within 3 years from Sale of old property (same as section 54).
Third, You have to invest whole Sale proceed (not only Capital Gains) for exemption. If you invest partial amount of Sale proceed, the % of Sale proceed which is invested that % of Capital Gains will be Tax exempted. For Example: Suppose you purchased shares of Rs. 5 Lakhs and its value becomes Rs. 10 Lakhs over the time and then you sold it, your Capital Gains on this transaction is 5 Lakhs. Now you decided to invest 6 lakhs of this sale proceed in purchasing new House property. The amount 6 lakhs is 60% of whole sale proceed and hence you will get exemption on 60% of Capital Gains of 5 lakhs = Rs. 3 lakhs.
Fourth, You have to keep your Capital Gains in Capital Gains Account Scheme, if you need some time after selling existing property and before purchasing new House property. Here also exemption is reversed if you sell new property within 3 years of Purchase or Construction.
These are the 3 options from which you can claim the Tax exemption whenever you do Sale of any Capital Asset. One should claim Tax exemption with proper Tax planning.
