If the property is sold after three years of purchase, the resultant gains (known as long-term gains) are taxable at a fixed rate of 20%. When it comes to long-term capital gains, the acquisition cost of the asset is recalculated based on indexation, which factors in inflation in its calculation by using the Cost-Inflation Index. The benefit is that tax on a long-term capital gain is taxed only at 20% after indexation. This brings down the amount of tax payable considerably compared to short-term capital gains tax.
Apart from this, you might be able to avoid paying tax on the sale of the house, and you also have options to reduce the tax burden following the sale of real estate.
Option 1: Capital gains from the sale of a house is exempt from tax if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years. However, one cannot claim the tax exemption by investing in a commercial property or land. To save tax, you have to invest in a residential property in India only.
Option 2: Long-term capital gains from sale of a residential property have been exempted from tax, if the sale proceeds are invested in a small or medium enterprise in the manufacturing sector. The fund should be used by the enterprise to acquire new plant and machinery before the due date of furnishing of return of income by the assessee. The pre-condition for availing this tax benefit is that the equity holding or voting power of the taxpayer in the enterprise after the investment should be more than 50%.
Option 3: Certain instruments like capital gain bonds have been prescribed in which the profit arising from the sale of a property can be invested to avail tax exemption. These instruments have a lock-in period of three years and the maximum limit for investing in such instruments is Rs 50 lakh. These bonds are currently being issued by NHAI and REC. If the entire amount of long-term capital gains is invested in these bonds, the tax is fully exempted.
Option 4: If a property has not been purchased before the return has been filed or before the due date for filing the tax return, whichever comes earlier, the money has to be deposited in a special account known as the Capital Gain Account Scheme (CGAS). Doing this conveys to the authorities that you intend to buy a property to save the capital gains tax. Any withdrawal from CGAS should only be for payments to be made in relation to the purchase of the new property.
It is imperative to keep in mind that the new property purchased to claim the tax exemption has to be held for a minimum period of three years, failing which the capital gains arising from the sale of the new property, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new property.
The writer is managing partner,
Nangia & Co. With inputs from
Neha Malhotra, Nangia & Co