Tag Archives: Capital gains

How to Save Capital Gain Tax on the Sale of Residential Property

Posted on by

Capital gain is the increase in the value of an asset over time. The owner realizes this capital gain when the property sells. The difference between a property’s selling and purchasing prices is capital gain. 

Any profit derived from a capital asset will qualify as Capital Gains for income tax purposes and be subject to capital gains tax. The land is known as a Capital Asset, and as its value rises, the owner may realize significant capital gains upon sale. Nonetheless, it is worth noting that agricultural land in rural India does not meet the definition of a Capital Asset. As a result, no capital gains tax applies upon its sale. Let us look at how profits from the sale of land will be taxed and how we can save money on taxes. 

Short-term or long-term capital gains

The tax implications vary depending on whether the gains are short-term or long-term. Capital gains are regarded as short-term if you owned the land for up to 2 years (24 months) before selling. It will, however, be considered a long-term capital gain if held for more than 24 months. 

How to Calculate Capital Gains 

Short-term capital gains (STCG)

The Particulars Amount 
Total Selling Price (xxx)
Less:(xxx)
Acquisition Cost (xxx)
Direct Sale Expense (xxx)
Exception Sections- 54B, 54D, 54G, 54GA(xxx)
STCG (Short-term capital gains)(xxx)

The only difference for Long capital assets is that you can deduct the Indexed Cost of Acquisition/ or indexed cost of Improvements from the sale price. Indexation is a way of adjusting the purchase price to account for the impact of inflation using the Cost Inflation Index (CII). This adjustment increases your cost base (and reduces your gains).

Particulars Amount 
Total Sales Price (xxx)
Less:(xxx)
Acquisition Cost Index (xxx)
Direct Sales Expense (xxx)
Exemption Section: 54B, 54D, 54EC, 54F, 54G, 54GA(xxx)
Long-term Capital Gain (xxx)

What are the Tax Rates?

  • STCG is taxable income and taxable at the applicable slab rates. See the latest income tax slab rates. 
  • LTCG gets taxed at a rate of 20%, with an indexation benefit. 

How to save Capital Gain Tax on the sale of residential property

Section 54F (applying if the asset is a long-term capital asset)

If you use the proceeds from the sale of land to buy a house, you may be able to claim an 

exemption from capital gains tax if you meet all of the following conditions:

  • The exemption only applies to individuals or HUFs; it’s not open to corporations, LLPs, or firms. 
  • The new house you buy or build must be in India. 
  • Purchase the house within one year of the land sale date or two years after the sale date. 
  • Build one house within three years of the date of the land sale. 
  • Do not sell the house within three years of purchasing or building it. 
  • You should only own one residential house on the transfer date, excluding the new one. 

If you meet these requirements and invest the sale proceeds in the new home, you will not be subject to capital gain taxes. An exemption is proportional to the amount invested, which is the cost of the new house multiplied by the capital gains/ net consideration. 

By Investing in Capital Gains Account Scheme 

Finding a suitable seller, arranging the necessary funds, and completing the vital paperwork for a new property can be a stressful and time-consuming jobs. Fortunately, the Income Tax Department is aware of these constraints. 

If you need to invest your capital gains till you file your income return (usually on the 31st of July), you may deposit them in the Capital Gains Account Scheme (CGAS). And claim this as an exemption from capital gains in your return; you will not have to pay tax on it. 

54EC (applicable if it is a long-term capital asset)-Purchasing Capital Gains Bonds 

What if you never intend to purchase another property? It is pointless to invest the money in a Capital Gains Account Scheme. In this case, you can still save taxes on your capital gains by putting them in the following bonds:  

  • Rural Electrification Corporation Limited bonds, also known as REC bonds, 
  • Bonds issued by the National Highway Authority of India, or NHAI. 
  • Power Finance Corporation Limited bonds, also known as PFC bonds, 
  • Indian Railway Finance Corporation Limited, or IRFC, issued bonds. 

These are redeemable after five years and cannot be sold within three years of the house’s sale date. 

You have six months to invest in these bonds; however, to claim this exemption, you must invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50 lakhs in these bonds in a financial year. 

How to save tax on property – For sellers

Posted on by

When selling a property, sellers want to know how much tax they’ll pay and whether there is any way to reduce or avoid the tax. The article below focuses on capital gains tax for sellers who are selling a property.

A self-occupied house gives you two avenues of saving taxes which are the payment of interest and repayment of principal. You can get Rs 2 lakh deduction under section 24b of the Income-tax Act, 1961 on interest payment and Rs 1.5 lakh on principal repayment under section 80C.

What is a Capital asset?

Capital assets include land, buildings, jewelry, vehicles, trademarks, machinery, patents, and licenses. When a capital asset is sold and any profit is received, it is known as capital gains. Agricultural land is not a capital asset.


Capital gains tax on residential property for sellers:

To understand capital gains, let’s consider an example. Regarding residential property, there are two types of capital gains tax: long-term capital gain and short-term capital gain. We will now discuss these two taxes.

  1. LTCG (LONG-TERM CAPITAL GAINS)- If you hold a property for more than 24 months, you pay a flat rate of 20% tax on any capital gains. Exemptions are available in this.
  2. STCG (SHORT-TERM CAPITAL GAINS)- If you hold the property for less than 24 months, you will be charged short-term capital gains tax. The government taxes the individual at their slab rate of income tax. If you are in the 30% bracket, then STCG will be 30%. You do not receive any benefits for indexation (i.e., inflation). The amount for which you purchased the property and sold it, the difference will be taxed.

The following chart illustrates and differentiates between long-term capital gains and short-term capital gains.

CAPITAL GAINS ON RESIDENTIAL PROPERTY                STCG                         LTCG
TIMELess than 24 months(2 years)        More than 24 months (2 years)
TAX@Slab       Flat rate 20%
EXEMPTIONNo    Yes
INDEXATIONNo       Yes

Capital gain tax exemption:

Furthermore, we will discuss three ways in which you can save on long-term capital gains tax when selling residential property and other assets.

  1. SECTION 54- Under section 54, individuals and Hindu undivided families (HUF) can claim tax benefits on residential property they own. The minimum holding period is two years. It is important to note that only residential properties qualify for this section; commercial properties do not qualify. Next, the residential property must be a constructed property that you are selling. If you are selling the residential plot, then you will not get any benefit from it. If you invest the profits received from the proceeds in the purchase of 1 or 2 residential properties or the construction of another property, you will get a complete exemption from long-term capital gains tax.
    1. The capital gains from selling the property must be put in a new property which can be purchased within 1 year of the sale or within 2 years of the sale, in order to claim tax exemption. Similarly, if you are constructing a property, then for the forthcoming 3 years, if construction is completed, tax exemption will be available for you. Here, you only need to invest the number of capital gains i.e. profits; you do not have to invest the entire amount.
    2. FOR EXAMPLE: Twenty years ago you purchased a residential property for Rs 60 lakhs. And now sold it for Rs 90 lakhs. So 30 lakhs is a long-term capital gain (LTCG). Invest this 30 lakhs in 1 or 2 properties or some construction work; you don’t need to invest the entire 90 lakhs. The maximum capital gain which you can claim is up to Rs 2 crores. This exemption can be claimed once in a lifetime and will be reversed if you sell this new property within 3 years from its purchase date. If you invest this amount into bank fixed deposits or a savings account, this cannot be claimed as an income tax exemption. Banks offer a capital gains account scheme if you wish to claim the tax exemption.
  2. SECTION 54EC- Any individual can open a capital gains account. Any asset like; stocks, mutual funds, bonds, and house property may be used as collateral for this type of account. A 3-year holding period is required, with the ability to invest within 6 months. The maximum amount that can be supported is 50 lakhs, but all must be invested in specified bonds with a 5-year lock-in period. These bonds offer good returns on investment and are available only through this type of account.
  3. SECTION 54F- Now, finally, we come to Section 54F. In this section, any individual or Hindu Undivided Family (HUF) can claim tax exemption on capital assets other than a house property. Such assets include bonds, stocks, commercial property, and plots. The person taking the exemption shall not hold more than one house property. To acquire the asset’s value, you must buy residential property or construct it. This section does not cover any plots. The time limit for claiming tax exemption is 1 year back or 2 years forward if you purchase a property; construction is forward 3 years.

There are some other conditions under SECTION 54F and i.e.;

  1. The entire sale proceeds must be invested. Invest the entire 90 lakhs and not a partial amount or capital gains on which you can claim full exemption. You can only claim a partial exemption if part of the money is invested.
  2. If you sell this new property within three years of its purchase, the exemption will be reversed.
  3. If you want to claim the capital gains tax exemption, invest in a capital gains account. You cannot claim this exemption on a savings account.

Tips NRIs Must follow to Reduce Tax Liability

Posted on by

NRIs (non-resident Indians) play a vital role in the development of real estate in India. However they face problems in selling their properties in India. Some useful tips are provided to reduce sale tax liability.

NRI faces Sales Tax Liability

NRI faces Sales Tax Liability in Selling of their Real Estate Property.

Before selling the property an NRI must be aware of some basic rules and regulations which govern the sale of any property in India.

As real estate investment is considered as the most suitable  option for investment, NRIs are tempted to invest more on properties especially in hotter areas like Mumbai or Bangalore. Continue reading →