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