According to RBI’s report titled, “The Indian Household Finance Landscape” in September 2017, 76.9% of household wealth in India is invested in real estate. 59% of the poorest 20% in the country own a dwelling unit of some kind or land. Thus, while selling your property, you will receive a sizeable amount which will in turn be subject to taxes. Understanding the nuances of capital gains will ensure that you optimise on taxes in the event of the sale of the property.
Time criteria for capital gains:
There are 2 types of capital gains taxation:
1. Short Term Capital Gain Taxation:
If the property is sold within a period of 36 months, then you will be liable to short term capital gains. The gain which is the difference between the sale and buy value will be added back to the income and the same will be taxed at marginal tax rates.
The same can be as high as 30% + cess + surcharge of someone earning above Rs. 10 Lakh a year.
2. Long Term Capital Gain Taxation:
If the property is sold after 36 months, the profit is treated as long term capital gains and can be taxed at 20% after indexation.
Indexation adjusts for inflation during the holding period, the purchase price is adjusted to reduce the tax burden on the seller.
The seller, in the event of long-term capital gains, can claim expenses incurred on repairs and renovations can be added to the purchase cost while computing long term capital gains. The interest paid under the pre-construction period can be added back to the cost. This benefit remains unavailable for short term capital gains.
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Tax Deduction for Home Loan:
The tax deductions under section 80C allow principal repayment, stamp duty, the section is subject to a maximum of Rs. 1.5 Lakh (including other investments) and section 24B allows interest payment on the home loans. However this deduction under section 80 C would be reversed if the house is being sold within five years from the end of the financial year in which possession of the house was obtained and the same will be added back to your income in the Financial Year in which it is sold. Nonetheless, there is no similar provision for reversing tax benefit claimed with respect to interest on home loan.
Optimising on taxes:
There are 2 options of optimising the taxes without having to pay it:
1. You can optimize your capital gains from the sale of a property by reinvesting in another house either by:
- Buying one within 2 years or
- Constructing one within 3 years.
This rule also applies to a house that you bought a year before selling the current property. The property should be in the name of the seller.
2. Alternatively, the balance can be saved in a capital gains tax scheme. The exemption may be claimed under section 54EC on investment in5-year bonds of NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) Limited within 6 months of selling the house. The maximum amount allowed that one can claim as an investment is restricted at Rs. 50 Lakh in these bonds during a financial year.
The long-term capital gains on the sale of a property can also be set off against long term loss on the sale of other properties. This long-term loss can be carried forward for 8 years. Short term capital loss can be set off against short term losses from the sale of property or other assets including other real estate property, stocks or gold.
In order to promote start-ups in the country, from the financial year 2021-22, the proceeds are now being allowed to be invested in technology start-ups that are certified by the Inter-Ministerial Board. The investment in such start-up businesses is allowed to claim exemption of tax on the sale of a house for 3 years.
The Government has made it mandatory for buyers to collect and remit TDS for any transaction worth over Rs. 50 Lakh. TDS is applicable at 1% for the cumulative value of the property before the payment is made to the seller. The buyer has to remit the TDS to the authorities and can claim credit for the payment. The TDS has to be remitted within 30 days from the date of the sale transaction. This TDS can be claimed as a loss on property sale under the long-term capital gains computation.
The tax regimes surrounding the sale of a property can be quite complex. Experts from Tata Capital Wealth can help you with the entire process concerning your tax regulation, this can ensure that you complete the transaction without any stress.