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.
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.
- 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.
- 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 |
| TIME | Less than 24 months(2 years) | More than 24 months (2 years) |
| TAX | @Slab | Flat rate 20% |
| EXEMPTION | No | Yes |
| INDEXATION | No | 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.
- 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.
- 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.
- 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.
- 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.
- 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.;
- 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.
- If you sell this new property within three years of its purchase, the exemption will be reversed.
- 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.