Purchasing property as an investment and selling it later at a higher price has become a common practice. If you sell real estate for a profit, you need to pay capital gains tax. This tax varies depending on the time period the property was held on to. Capital gains tax is definitely an aspect that every property seller should consider in a cost-sensitive market. The sale of a property involves short-term capital gains tax if it is sold before the completion of three years of purchase. Such gains are taxed at the same rate as applicable to any other income of a taxpayer.
However, if the property is sold after three years of purchase, the resultant gains ó known as long-term gains ó are taxable at a fixed rate of 20%. That apart, the taxpayer is entitled to avail the benefit of an inflated cost of acquisition of the property as prescribed. Also, you might be able to avoid paying tax on long-term capital gain arising from sale of the house, and also have an option to reducing the tax burden.
Tax provisions provide for exemptions for capital gains from the sale of a house 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.
Recently, courts have taken a liberal view in the sense that the period of construction may extend beyond the prescribed period of three years, but substantial money should have been invested by the taxpayer in the construction of residential property. This means you cannot invest in a commercial property or land to save tax ó you have to necessarily invest in a residential property. However, you should not own more than one house, that is, apart the house you are investing in.
From FY13, 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