How to save tax on property – For sellers

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.

Budget 2012: 1 per cent TDS imposed on property sales.

The government has proposed one per cent TDS (tax deduction at source) on transfer of immovable property if the sale value exceeds Rs 50 lakh in urban centres and Rs 20 lakh in other areas.

Finance Minister Pranab Mukherjee said in his Budget speech that the measure is proposed in the Budget and is being taken to “deter the generation and use of unaccounted money.” Immovable properties, other than agricultural land would be covered under the new provision.

The application of TDS would be effective from October 1 this year. It has been provided that transfer of property would not be registered unless the buyer furnishes proof of deduction and payment of TDS.

At present, tax is required to be deducted at source by the transferee on transfer of immovable property by a non- resident. But, there is no such requirement on transfer of such property by a resident except in few cases, it added.

Reacting to the proposal, the apex realty body CREDAI said that this would lead to increase in property prices.

“It looks like that the proposal of TDS would apply on transactions in the secondary market and not on sale of builder’s flat,” Confederation of Real Estate Developers’ Association of India (CREDAI) Chairman Pradeep Jain said.

The new proposal intends to collect tax at the earliest point of time and have a reporting mechanism of transactions in the realty sector.

The provision would apply if the consideration exceeds Rs 50 lakh if property is situated in “specified urban agglomeration” and Rs 20 lakh if property is situated in any other area.

Union Budget 2012-13: Buying or building of a house will cost more.

Realty players said that purchase or construction of a house would now cost more due to expected rise in prices of key raw materials cement and steel and a hike in service tax by 2 per cent.Barring low-cost housing, property prices are expected to rise in the coming days after the proposed hike in service tax from 10 per cent to 12 per cent.

TDS at the rate of 1 per cent on transfer of immovable property (other than agricultural land) above a specified threshold will also add to the cost of buying a house. The threshold would be over Rs 50 lakh an urban areas and Rs 20 lakh elsewhere, according to the budget proposals.

Cement and steel manufacturers have already hinted at a price hike after the Budget proposed raising the excise duty to 12 per cent.

Commenting on the budget proposals, Confederation of Real Estate Developers’ Association of India (CREDAI) Chairman Pradeep Jain said, “Application of TDS on the purchase and sale of property and increasing Service Tax by 2 per cent will further add on to the overall cost of property and are bound to make property more costly in coming days.”

Realty consultant DTZ said that increase in the service tax is going to further increase marginally the overall burden on the home buyers of mid and high segment (dwellings costing more than 25 lakh). The impact of service tax would be about Rs 40,000 on a Rs 75 lakh home.

However, DTZ said that affordable housing, being part of negative list, is exempted from service tax and the move would give a boost to the affordable housing segment.

Jones Lang LaSalle India Chairman and Country Head Anuj Puri said that “the increase in the service tax rate from 10 per cent to 12 per cent will increase the cost of production for developers, who are already reeling under high input costs. It follows that this increased burden will be passed on to end users”.