Capital gains made on selling a real estate property attracts 20% tax if the property is held for three or more years. For properties held for the short term, gains are taxed as per slab rates. Given the quantum of real estate property assets, the tax outgo on capital gains can be quite high.
However, income tax (I-T) laws allow taxpayers to avail exemption on capital gains made on the sale of a property by reinvesting the proceeds in certain assets.
“If a taxpayer sells a property and reinvests the proceeds in specified assets within the specified time frame, he can claim capital gains exemption. However, exemption is only allowed in case the gain arising is long-term capital gain (LTCG). No exemption shall be allowed in case the gain is short-term capital gain (STCG),” said Karan Batra, founder, charteredclub.com.
Investing gainsin residentialproperty
Under Section 54 of the Income Tax Act, an individual or HUF (Hindu undivided family) can use the capital gains booked from the sale of a property to purchase or construct another residential property to get exemption on tax on capital gains. Just the capital gains need to be reinvested and not the entire sale proceeds. Further, taxpayers can invest capital gains in two house properties. The conditions are that capital gains should not exceed ₹2 crore and the taxpayer can exercise exemption on two properties only once.
There are additional conditions to avail exemption on capital gains under Section 54. Capital gains should be invested in a residential property located in India and the new purchase should be made within one year before or two years after the sale of the property whose capital gains have to be reinvested. If the capital gains are used to construct a house, construction should be completed within three years from the sale of the property. Also, the new property in which capital gains are invested should not be sold before three years from the date of purchase, failing which the exemption claimed will be taxed in the year the new house property will be sold.
The amount of capital gains that can be exempted from tax will be the lower of capital gains made on sale of property and the amount of gains invested in a new residential property.
For instance, if the capital gains made on the sale of a property is ₹50 lakh and the new property is bought for ₹40 lakh, ₹40 lakh will be exempted from tax. The taxpayer will have to pay long-term capital gains tax on the balance ₹10 lakh.
Investment inspecified bonds
Section 54EC allows exemption on capital gains made on the sale of any immovable property by investing the proceeds in government specified bonds.
This exemption is available only on long-term capital gains made on a property and a maximum of ₹50 lakh can be claimed as exemption.
Bonds eligible for exemption are issued by Rural Electrification Corp. Ltd, National Highway Authority of India, Power Finance Corp. Ltd and Indian Railway Finance Corp. Ltd.
To avail exemption under Section 54EC, the taxpayer should invest the gains within six months of the sale of the property. Take note that these investments can only be redeemed after five years.
“In case where the investment in bond is transferred or converted into money or if the assessee takes a loan or advance on the security at any time within a period of five years from the date of its acquisition, the amount of capital gain exempt under Section 54EC shall be deemed to be long-term capital gain of the previous year in which the long term specified asset is transferred or converted into money,” said Batra.
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