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

Looking for how to save capital gain tax on sale of residential property? This comprehensive guide explores how to save capital gain tax on sale of residential property in India. With the right knowledge, sellers can navigate tax implications effectively, potentially saving significant amounts. From reinvesting profits in new properties to leveraging exemptions under relevant tax sections, understanding these tactics is crucial for optimising tax outcomes.

What is a Residential Property?

Residential properties are places where people live, like houses or apartments. These could be small or big, for one family or many. People often buy residential properties to rent them out to others and make money from them.

What is Capital Gain Tax?

Capital gain tax is the money you pay to the government when you make a profit by selling something for more than you bought it. For example, if you sell a house for more than you paid for it, you might owe capital gains tax. To figure out how much tax you owe, you subtract what you paid for the thing (like a house) from what you sold it for and then consider other costs too, like stamp duty and improvements.

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

Use Indexation While Calculating Capital Gains

Indexation is a method to adjust the property's purchase price for inflation, thereby reducing the taxable amount of capital gains. By applying indexation benefits, sellers can lower their tax burden significantly. This involves calculating the indexed cost of acquisition and deducting it from the net sale price to determine the taxable capital gains.

Purchasing Capital Gains Bonds: Section 54EC

Under Section 54EC, sellers can reinvest their profits from property sales into specified bonds within six months. These bonds, issued by entities like the Railway Finance Corporation and the National Highways Authority of India, offer tax exemptions on LTCG. While the interest earned on these bonds is taxable, the maturity proceeds remain tax-free, providing a tax-efficient investment avenue.

Capital Gain Account Scheme

The Capital Gain Account Scheme (CGAS) allows sellers to deposit their sale proceeds temporarily to avail of tax benefits. Sellers can deposit the proceeds in a CGAS account with a bank or a post office, enabling them to utilise the funds for specified purposes within the stipulated time frame. This scheme offers flexibility in managing tax liabilities and facilitates compliance with regulatory requirements.

Section 54F

Section 54F provides exemptions on LTCG arising from the sale of residential properties, subject to certain conditions. Sellers can reinvest the sale proceeds in purchasing or constructing a new residential property to claim these exemptions. However, the property must be acquired within specified timelines and meet the prescribed criteria to avail of the tax benefits under this section.

Section 54GB

Section 54GB offers tax exemptions on LTCG from the sale of residential properties when reinvested in eligible start-ups or small or medium enterprises (SMEs). This provision encourages investment in the entrepreneurial ecosystem by providing tax incentives to sellers. However, adherence to the minimum holding period and other eligibility criteria is essential to qualify for these exemptions.

Capital Loss Set Off

Property sellers can offset their LTCG from property sale against any long-term losses incurred from the sale of other assets, such as stocks or gold. By utilising capital losses, sellers can reduce their overall tax liability and optimise their tax planning strategies. This provision allows sellers to carry forward losses from previous years or utilise losses incurred in the current year to minimise tax obligations.

Repeat Sales and Investments

Engaging in repeat sales and investments in residential properties can also offer tax-saving opportunities. Sellers can leverage provisions like Section 54 to mitigate capital gains tax liabilities by strategically timing property transactions and reinvesting profits into new properties. This approach requires careful planning and execution to maximise tax benefits effectively.

How Much is The Capital Gain Tax On Sale of Residential Property In India?

The Capital gains tax rate on selling residential property in India is 20%, along with the applicable cess and surcharge. However, inherited properties are exempt from taxation until the heir decides to sell them. In such cases, the long-term capital gains tax is applied as per standard regulations.

How is Capital Gain Tax Calculated on Sale of Residential Property in India?

Several key factors determine capital gains tax on the sale of residential property in India. Firstly, it considers the property's final selling price, the acquisition cost (the property's value when purchased), improvement expenses (any modifications or enhancements made to the property), and transfer costs like registry charges. Additionally, the duration of property ownership impacts the calculation.

Short-Term Capital Gain

Short-term capital gains (STCG) arise if a property is sold within 24 months of purchase. The tax on STCG is calculated based on the seller's applicable income tax slab rate. This gain is added to the seller's total income and taxed accordingly.

The formula for capital gain tax calculation for residential property for Short-term duration is Final Sale Price (Cost of acquisition+Home improvement cost+Cost of center).

Long-term Capital Gain

On the other hand, long-term capital gains (LTCG) occur if a property is sold after 24 months. LTCG is computed after adjusting the purchase price for inflation through indexation. The tax rate on LTCG is fixed at 20%, with an additional 4% cess, resulting in a net rate of 20.8%. This tax is levied on the calculated LTCG amount.

The formula for capital gain tax calculation for residential property for Long-term duration is Final Sale Price (Indexed cost of acquisition+Indexed cost of improvement+Cost of transfer).

Key Factors of Capital Gains Tax on the Sale of Residential Property

Cost of Property

The cost of the property encompasses various expenses incurred during its acquisition, including brokerage charges, stamp duty, registration charges, and money spent on improvement and renovation. For tax computation purposes, the total cost of the property is considered. For instance, if a property was purchased for Rs. 50 Lakh and Rs. 20 Lakh was invested in renovations, the total cost for tax calculation would be Rs. 70 Lakh.

Cash Payment for Property Improvement

Cash payments made for property improvement can also be included in the overall property cost for tax computation. However, taxpayers must provide evidence that no unaccounted money was used for these payments. Additionally, they need to explain the source of cash payments made for improvement works to claim relief in tax liability.

Holding Period for Capital Gains

The holding period, or the duration for which the property is owned before sale, plays a significant role in determining the tax liability. Short-term capital gains (STCG) incur higher tax liabilities, while long-term capital gains (LTCG) are taxed at a fixed rate of 20.8%, irrespective of the taxpayer's tax slab.

Investment in New Property

Tax liability can be minimised or reduced to zero by reinvesting the proceeds from the sale of the old property into a new one within a specified period, subject to certain terms and conditions. The Central Board of Direct Taxes (CBDT) has extended the deadline for such reinvestment to March 31, 2023, for investments made between April 1, 2021, and February 28, 2022.

Property Ownership

Sellers who own multiple properties typically face higher tax liabilities compared to those who own just one property. This is due to the additional income streams generated from multiple properties, which can push them into higher tax brackets.

Capital Gain Tax on Sale of Residential Property: Things to Keep in Mind for Sellers

• Holding Period Matters: Based on the duration of ownership, determine whether the profit from the property sale qualifies as Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG). The taxation varies accordingly.


• Exemptions Under Tax Law: Despite delays or issues with property possession, exemptions under tax law sections such as 54 and 54EC may still apply, offering relief to sellers.


• Minimum Registration Value: Property registration cannot occur below a certain value set by state authorities. Even if sold for a lower price, taxes are calculated based on the minimum registration value.


• Investment Options: If unable to reinvest sale proceeds into another property or specified bonds, consider depositing the balance in The Capital Gains Account Scheme to remain eligible for deductions.


• Compliance with Tax Regulations: Ensure compliance with tax regulations regarding the sale of residential property to avoid penalties or legal issues.

Tips to Save Tax on the Sale of Residential Property

Holding Period of the Property

The duration you own the property before selling it affects the tax liability. This period categorises capital gains into Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).

Short Term Capital Gains (STCG)

If you own the property for less than 24 months, it falls under STCG. Tax is levied at your regular income tax rate based on your tax bracket or slab.

Long Term Capital Gains (LTCG)

Ownership of the property for more than 24 months qualifies for LTCG. In India, tax on LTCG is around 20% based on the profit earned. However, there are various rebates available to taxpayers under the LTCG regime.

Conclusion

What is a Residential Property?

Residential properties are places where people live, like houses or apartments. These could be small or big, for one family or many.

What is Capital Gain Tax?

Capital gain tax is levied on the profit earned from selling assets like property. It's calculated by subtracting the purchase price from the selling price, accounting for additional expenses.

How to save capital gain tax on the sale of residential property?

• Use indexation while calculating capital gains
• Purchasing capital gains bonds: Section 54EC
• Capital gain account scheme
• Section 54F
• Section 54GB
• Capital loss set off
• Repeat sales and investments

How much is The Capital gain tax on the sale of residential property In India?

The Capital gains tax rate on selling residential property in India is 20%, along with the applicable cess and surcharge.

How is capital gain tax calculated on the sale of residential property in India?

• Short-Term Capital Gain
• Long-term Capital Gain

Key factors of capital gains tax on the sale of residential property

• Cost of property
• Cash payment for property improvement
• Holding period for capital gains
• Investment in new property
• Property ownership

Capital gains tax on sale of residential property

• Holding period matters
• Exemptions under tax law
• Minimum registration value
• Investment options
• Compliance with tax regulations

Tips to save tax on the sale of residential property

• Holding period of the property
• Short Term Capital Gains (STCG)
• Long Term Capital Gains (LTCG)