If you sell your house after two years (i.e. 24 months) from the date of purchase, the gain, if any, will be treated as long-term capital gain (LTCG). The LTCG is not only taxed at a flat rate of 20 per cent, but also allows you to claim indexation benefits as well as provides various investment opportunities to save even the entire tax.
To reduce or eliminate the tax burden on LTCG, you may utilise the provisions Section 54 of the Income Tax Act to buy or construct a new house.
Archit Gupta, Founder & CEO, Clear explains the details of the tax-saving investment options u/s 54:
Buy or Construct a New House
If you sell a residential house and earn LTCG, you can plan to invest the capital gain proceeds in buying a new residential house and can claim the exemption for such LTCG under Section 54. The capital gains will be fully exempt if you redirect the entire capital gain proceeds into buying or constructing the new residential house property.
However, the law requires that the new house must be acquired within one year before selling the old property. The exemption is allowed if one acquires it within two years from the sale date of the old property. Exemption under the said section is also allowed if the residential house is constructed within three years of the sale date of the old property.
Provision of Buying Two Houses
From Assessment Year 2021-22, you can claim an exemption under Section 54 if the investment is made in two residential house properties. Before this, the exemption was allowed only for purchasing only one house property. The exemption for the investment made in two residential house properties shall be available if the LTCG does not exceed Rs 2 crore. The taxpayer shall be entitled to exercise this option only once in a lifetime.
Depositing in Capital Gain Account
If you cannot invest your LTCG before the return filing due date and if the timelines mentioned in the prescribed income tax rules have not expired, you can park the LTCG/sale proceeds in a capital gain account. You can open this account with a public sector bank or other banks notified in the Capital Gains Account Scheme, 1988.
If you have incurred any long-term capital loss, you may adjust it against the LTCG from the sale of the house property to reduce the investment requirement for tax saving.