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How to save tax on long term capital gains on sale of property

The capital gains can be fully absolved if the entire amount of the capital gain is utilized in buying or constructing a new property.

How to save tax on long term capital gains on sale of property
Long term capital gains are basically the profit earned by means of the sale of a house after the possession of the same for two years or more.

Gone are the days when houses remained with families for generations and decades. In today’s urban world, it is very common to change residences frequently in one lifetime. Selling one home and buying another is now a necessity to upgrade one’s lifestyle. Savvy customers often, while undergoing such a change, make gains on the sale of their property. Such gains lead to what is called the Long term capital gains (LTCG).

Long term capital gains are basically the profit earned by means of the sale of a house after the possession of the same for two years or more. According to the Income Tax Act, this profit is taxable under capital gains at the rate of 20 per cent. To reduce and at times even do away with the tax liability on long term capital gains, one can make use of the provision of Section 54 of Income Tax Act.

The capital gains can be fully absolved if the entire amount of the capital gain is utilized in buying or constructing a new property. The amount can be invested in a ready to move in house or even to construct a new house. Booking an under-construction property is also considered similar to the construction of a house by the individual. The time period stipulated for investment in a ready to move in house is two years from the sale through which capital gains were earned. However, one can apply for a long-term capital gains tax exemption even if the purchase occurred a year before the old home was sold.

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Furthermore, if the investment for exemption is done through an under- construction property, it can be claimed only if the construction of the property is completed within three years of sale of the earlier house. There is yet another provision wherein the construction of the house has commenced before the sale of the residential property or there has been a booking of another residential property before the sale of the residential house, the exemption can be claimed until the building is finished in three years or the possession happens within three years. It is vital to note that long-term capital gains exemption under Section 54 hold good only if the investment is made in India, solely in residential real estate only and the new property cannot be sold before three years of taking possession.

An alternate method to avert tax on long-term capital gains from the sale of a residential property was by investing the same in capital gains bonds of postulated institutions. Institutions that had been providing this service were National Highway Authority of India, Railway Finance Corporation and Power Finance Corporation Limited. There is a time limit to these investments as well and the bonds must be acquired within six months of the day the property is sold. There is also a stipulated cap to the amount that can be invested through this mode and rate of interest ranges between 5% and 6% with a lock-in period of five years.

Real estate has always been a preferred choice of investment for the Indian consumers, as the rate of returns is very healthy. Gains made out of real estate transactions can be maximized when the beneficiary is aware of the ways to minimize the tax liability.

(By Mrinaal Mittal, Director, Black Teak)

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