While undergoing the property sale process in India, you may be subject to capital gains tax on the profit earned, which considers inflation and indexed cost of acquisition. However, there are strategies to minimize this tax burden. Selling a property can already be complex, and dealing with capital gains tax can add stress and frustration. The Indian Government has provided multiple tax exemptions to property sellers that can assist in reducing, and in some instances, even eliminating, the long-term capital gains tax that is payable.
We will learn about ways to help save capital gain tax on property sale in India. But before that, let us know what a capital gain tax is.
Capital Gain Tax
A capital gain refers to the profit an asset’s owner obtains upon its sale, resulting from increased value over time. In simpler terms, it is the difference between an asset’s selling price and purchase price. So, capital gains tax is levied on the sale of residential property. This can be further classified into two:
· Short-term capital gain: Selling your land/house/property within three years of acquiring it is a short-term capital gain. The tax payable will depend on the individual’s Income Tax slab.
· Long-term capital gain: if you sell it after three years, it is a long-term capital gain, which is taxed at 20% plus a 3% cess if the sale meets certain conditions.
Tips to Save Capital Gain Tax on the Sale Of Residential Property
Selling a residential property can result in a significant tax liability due to the high value of the transaction. To reduce or avoid long-term capital gains tax (LTCG) on the sale, you can consider the following options:
· Reinvesting the sale proceeds in another residential property is a popular way to save on taxes. Identifying the replacement property before the sale is essential to avoid delays in utilizing the funds.
· Another option is to deposit the sale proceeds in a Capital Gains Account Scheme, 1988. This requires opening a separate account in an authorized Indian bank.
· Capital gains bonds issued by the Central Government are also a viable investment option for saving tax on property sales.
· Some public sector financial institutions offer this tax-saving provision, which is worth exploring.
Suppose you don’t want to invest the capital gains earned from selling your property in a new residential property or constructing a new one. In that case, you can invest your profits in “Capital Gain Bonds” under Section 54EC of the Income Tax Act. These bonds are also known as “54EC bonds” and are a widely used option to save on Long-Term Capital Gains Tax.
Another way to save on capital gains tax is to opt for the Capital Gains Account Scheme (CGAS). This scheme is designed for individuals who can only invest in a new property after filing their income tax returns. The investment period for this scheme is three years.
If you cannot immediately construct a property after earning a capital gain (but plan to do so in the future), you can deposit the profit amount in a public sector bank under the Capital Gains Account Scheme (CGAS). This allows you three years to start the construction of your property. If you don’t initiate construction within this period, the capital gain amount will be taxed as a long-term capital gain (at 20% plus a 3% cess).
The Income Tax Department has presented various viable options to save long-term capital gains tax, highlighting the importance of carefully considering personal finance goals before making decisions. Seeking advice from financial experts is also advisable. These tips will be helpful in your upcoming property sale in India and save you a handsome amount.