5 Ways To Save Capital Gains Tax On Sale of Property

By | January 4, 2017

5 Ways To Save Capital Gains Tax On Sale of Property

Capital Gains Tax could prove to be a troublesome determinant while selling a property. It’s like a gush of wind, which often takes us by surprise. Almost like an unforeseen emergency that can only be mitigated with a Loan. Even so, one should always be aware of the possibility of facing a set back because of Capital Gains Tax. It is often a substantial amount and may come as a rude shock if it isn’t calculated in advance. Sometimes this form of taxation is even levied at a rate as high as 20%.

The smartest move would be to learn all about Capital Gains Tax before selling or dealing in property. If you are not prepared to pay the tax then it might come as an uninvited guest and leave you distressed and financially dissatisfied. But keep in mind, when investing in property, paying the Capital Gains Tax is mandatory. In this article we will discuss how to save on Capital Gains Tax on sale as much as possible.

Additional Reading: How To Save Tax On Long-Term Capital Gains?

Calculate the rate using Cost Inflation Index

One of the most effective ways to decrease Capital Gains Tax on your property dealing is by calculating the cost of it through the use of a cost inflation index. The index is responsible for showcasing the increase in inflation every year. You can use this method and arrive at a cost (of the property) in accordance with the rise in inflation. This way, you can increase the cost of the property accordingly.

For instance, if the index has doubled from 100 to 200, then you can also increase the cost of the property from 10 lakh to 20 lakh. This would result in the assumption that since inflation has an incremental effect on the cost of the property, you are not gaining a huge profit from the transaction.

The inflated cost correspondingly decreases the Capital Gains Tax. You can check the cost inflation index and make the necessary changes to save on this tax, which will be levied on the sales.

Additional Reading: How to Minimize Capital Gains Tax on Property

Acquire a new house, or construct one

Let us assume that you are looking to shift into a new home or maybe build one. But, in order to do so, you have to sell your old property. In such a situation you are not really gaining a profit from the sale of your property. Section 54 of the Income Tax Act dictates that relief will be provided to a person who sells off his old property in order to build a new residential house.

Moreover, according to section 54F, if a person sells non-residential land to buy a residential one, then the tax levied upon that transaction may be exempted. It allows the seller to breathe easy because the capital gain calculated from the purchase is compared to the Investment the person is making in order to build a new house.

You can avail this facility even if you have bought a house prior to selling your property. Even if you’ve bought a property two years of selling your own, you can receive exemption from Capital Gains Tax. However, it is important to remember that you cannot sell your newly acquired property for three years or else the policy will lapse and you will have to pay a heavy tax.

Additional Reading: Capital Gain Exemption

 Opt for Capital Gains Bonds

People who are not eligible to avail benefits under Section 54 can opt for Capital Gain Bonds. How do the bonds work? Well, in simple terms, any capital gain you receive from selling property can be put into these bonds in order to get relief from Capital Gains Tax.

So, even if buying a new residential property is not on the cards, you can still seek rebate from having to pay a huge sum of money. You receive a rate of interest of approximately 6% on Capital Gains bonds, which may be lower than normal deposit rates, but is still quite good if you do not want to lose money.

Important things to remember – You must deposit the gains into bonds within six months of making the transaction. Also, you cannot free your money for three years after getting them converted into bonds. There are other important factors, which you can find on further inspection. It is always advisable to be certain and well aware of the policies before taking any steps.

Additional Reading: Know Your Capital Gains When You Sell A Property

Account schemes related to Capital Gains

Another option for people who cannot opt for capital gain bonds, nor benefit from Section 54, is to file for a Capital Gains Account Scheme. This can be made prior to filing income tax returns and can be opened only with specific financial institutions. There are certain conditions which come with availing this policy, which must be read carefully before opting for the scheme.

Additional Reading: Capital Gains Tax For NRIs

Setting off capital loss against the gain

Another way of saving on capital gains tax is to show capital loss against the gain which you receive after the transaction. However, there are a number of rules and regulations that govern this particular tax-saving avenue. For instance, one rule implies that the loss shown can be carried for eight years before availing the benefit from it.

Capital Gains Tax is very real and can be hard to deal with if one is not prepared to find remedial methods to tackle it. Make sure you do all your research in advance in order to minimise the impact this tax may have on your finances.

Bonus Read: All About Capital Gains Taxes

With Capital Tax Gains out of the way you can look at other Investment options such as Mutual Funds and Fixed Deposits. We have a host of them for your perusal.

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Category: Capital Gains Taxes Yahoo

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18 thoughts on “5 Ways To Save Capital Gains Tax On Sale of Property

  1. SPatel

    Dear Sir,
    Thanks for your valuable article on how to save capital gain tax on sale of land.
    I purchased a piece of vacant land in urban area in 2005 through registered sale deed. The registration value of the land was Rs 2 lakhs.
    I requested the authorised valuer of IT Department to make present valuation of the land. He has reported that the valuation of the land is Rs 40 lakhs as on March 2017. If the said land is sold now for Rs 40 lakhs, kindly enlighten if the value of land will be taken as Rs 2 lakhs and indexed or it will be taken as Rs 40 lakhs for calculating the long term capital gain tax. Kindly quote the relevant rule/ section of ITAct/Rules.
    Yours Faithfully,
    S Patel

    1. Team BankBazaar

      Hi SPatel, The indexed value of the property will be used to calculate the cost of acquisition of the property. For long-term capital tax calculation, the cost inflation index is considered as a major component. This index is fixed and declared by the government every year. So in order to get an idea about the taxes applicable on your long-term capitals gains, you need to check the inflation index and do your calculations accordingly. As per the income tax provisions, LTCG arising from the sale of a capital asset (residential or non-residential property) is exempted under Section 54/54F, if the net sale proceeds are invested in purchase or construction of one residential property. For more information – please read this blog post.

  2. Kaustubh

    Excellent blog, thanks for writing!

    I own a piece of residential land in Pune.
    Planning to construct a residential project (building) in joint venture with a builder/developer.
    As per agreement, I will be entitled for ..% amount of sales.

    I have purchased the land in Feb/15, What will be tax implications on the % amount I will receive?(As per agreement with builder/developer)

    e.g. Let’s say,I receive 30 Lakhs each in 2 consecutive financial years. What & how much tax will one need to pay on this amount?
    I am salaried & already in 30% bracket.

    1. Team BankBazaar

      Hi Kaustubh,

      We would love to help you, but since your question is specific in nature we would advice you to contact your legal counsel.

      Team BankBazaar

  3. Harish

    Dear Sir,

    I have ancestors property ( my own house) in Kerala. I want to sell this property. Kindly tell me the tax implications after sales.

    Best Regards,


  4. seshavadhani Ch

    Respected Sir,
    I purchased one Aptment in April 2018 with SBI Homeloan with EMI paymet through my pension, and after i sold house plots, and purchased another Aptment during Dec 18,, After I sold 2500 sq yrd land in the month march18, ( which was purchased during 2006)an amount 26.5 lakhs deposited in REC Bonds. now i want to sell balence of above land 600 sq yards, and i want to purchase land at another city.
    can i sale and purchase land, pl advise.

    Reply ↓

    1. Team BankBazaar

      Hi Seshavadhani, You can sell or buy land. However, you might have to pay capital gains tax. We suggest that you get the help of a chartered accountant. Cheers, Team BankBazaar.

    1. Team BankBazaar

      Hi Seshavadhani, This is completely up to you. You can choose to purchase either. Cheers, Team BankBazaar

  5. Gopalakrishnan

    Mr.X planning to sale his land and Building property. The purchase price of the property is Rs.8.00 Lakhs and selling price is Rs.1.00 Cr. He reinvests the following options.

    1. He planning to close a Landed property purchase loan of Rs.25.00 Lakhs
    2. He also planning to purchase two plots ( Land only)

    The above two options he can avoid capital gain tax.

    please advise sir,

    1. Team BankBazaar

      Hi Gopalakrishnan,

      Sorry, but you will have to pay capital gains tax as both the options mentioned do not provide an exemption from capital gains tax.

      Team BankBazaar

  6. vijay kumar GS

    Are these transaction provide LTTG relief
    1. Sell Land for 1Cr purchase Land for 2Cr
    2. Sell Land for 1Cr purchase old house for 2.5Cr
    3. Sell land for 1Cr and build house for 75Lakh
    4. Sell Flat for 50 lakh and purchase Land for 2Cr
    5. Sell Flat for 50 Lakh and puchase house for 2.5Cr
    6. Sell Flat for 50Lakh and build house for 75Lakh

    1. Team BankBazaar

      Hi Vijay,

      You could save LTCG taxes by either investing in a residential property or capital gain bonds. Note that agricultural land will not part of this.

      Team BankBazaar

    1. Team BankBazaar

      Hi Splendidgroup,

      We’re glad we could be of help to you. Keep reading our blog for more insights into the world of finance.

      Team BankBazaar

  7. Property in Himachal Predesh

    The information about how to save capital gains tax on the sale of the property is well described above. These tips are so helpful and valuable for any real estate person. If you are looking for property sale or buy in Himachal Pradesh then contact +91-95553 96371 to India Property Clinic available online on 24/7 time.

    1. Team BankBazaar

      Hi there,

      Glad you found this article useful. Have a nice day!

      Team BankBazaar


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