So you’ve just sold your property and earned some profits on it. You’re probably aware that in India, any kind of property sale is taxable. These taxes, known as long-term capital gain taxes are charged not on the whole amount for which the property has been sold, but only on the profit that has been earned after selling it.
Hence, it’s extremely important to determine the time when you wish to sell your property so that you can save some taxes on the profits you’ve earned.
While we might be aware that we can get tax exemptions on our long-term capital gains, the nitty-gritties may not be clear for all. Let’s quickly help you understand how you can get tax exemptions on the profits which you earned after selling your property.
Understanding capital gain tax
Even before you think about tax exemptions on long-term capital gains, understand the basics:
- You can only reduce your tax if you hold on to your property for at least three years
- If you sell your property before three years, then the profits fall under the short-term capital gains, and will be taxed directly depending on your income slab. Patience is a virtue, so hold on!
- If you sell your property after three years, a flat tax rate of 20% is levied on the profits.
- If the property which you are selling has been inherited or gifted to you, the capital gain taxes will be applicable on the acquisition cost of the original owner
- In case if you are unable to find a suitable property to buy within two or three years, you can take part in a special capital gains accounting scheme in a public sector bank. You can only buy or construct your new house with your sale amount. It will be taxed if used for any other purpose.
So start looking for a new property to buy or a plot to construct a house on even before you think about selling your old property.
Now that you’ve got the basics down, let’s learn about some useful terms.
When calculating your capital gains, one of the most important factors you should be aware of is indexation. Since commodity prices are always on the rise, the actual price of the property which you are planning to sell also must have gone up from the time it was purchased.
So when you calculate your profits on the property sale, you need to index the price as per the inflation prices in the country to get the real value of the property. The Indexed Purchase Price varies from one year to another. So when you decide to sell your property, remember to check this price before calculating your capital gains.
Once you get the Indexed Purchase Price, you can subtract it from the selling price to get an idea about your capital gains.
Tax exemptions on long-term capital gains
Moving on to the ways in which you can save taxes on your property sale. If you want to save yourself from paying capital gains taxes:
- You will need to purchase or construct a new residential property with your capital gains.
- The new house has to be bought either one year before the sale or within two years of selling the property.
- In case you wish to construct a new house with your gains, you have to finish the construction within three years of selling the property. Remember, that even under construction houses fall under the tax scanner, if they are built with your capital gains
- Only one property can be purchased or constructed with the capital gains
- As per the new Income Tax guidelines (Financial Year 2014-15), the property has to be located in India for you to claim tax exemptions
It’s important have a plan in place before selling your house, in order to save your taxes.
If you are unable to invest your capital gains in a new property or the construction of a new house, by the date of filing of your Income Tax return, you have options.
You can deposit your gains in a PSU bank as per the Capital Gains Account Scheme, 1988 and can claim tax exemption on this, but you need to re-invest the amount within a specified time period.
Alternatively, you can buy bonds issued by the National Highway Authority of India or Rural Electrification Corporation to help save your taxes. You need to invest in these bonds within six months to claim tax exemption and you can invest a maximum of Rs. 50 Lakhs in these bonds.
We hope that you now have a good idea about how you can save on your long-term capital gains taxes!
When a long term capital gain is deposited in Capital Gains Account Scheme, is the interest earned from the term deposit taxable? If the bank deducts 20% of the interest earned, can we claim a refund of this amount while filing the tax returns?
The interest on your capital gain account is subject to taxation as per your tax slab. If you are eligible for a refund, you can claim the same.
“Sir, I am planning to sell a site in Bangalore that was allotted to me through a society during 2002. I expect long term capital gains from that. After selling the site I am planning to buy a plot of agricultural land in my village in my wife’s name as she already is having an RTC in her name. I have been paying income tax through my salary income over the last 30 years. As I am going to invest the full amount of the sales proceedings on the land, should I still need to pay for the Capital gains tax? Note that I have agricultural lands available within 6 km from a town of over 1,00,000 and also the land that is out side this limit. What would be the situations for both?
Hi Vinod Kumar,
Since land is a capital asset, you will incur capital gains when you sell the same. As far as we know, you need to invest the capital gains in a residential property (not land) to get capital gains exemption. Read this post for more information. Also, if agricultural land is within 8 kms of urban limits, it will be exempt from tax when you sell it. We suggest tht you contact your legal advisor for more clarity.
sir, i have a query about long term capital gain. my grandfather has purchased a plot in 1963 for about rs. 4000. Then he had build an house on it. Right now he is 93 year old, and want to sale this property. Currently the market rate for this property is almost 1.5 cr. My grandfather has Four Daughters and No Son. The money is equally distributed among all 4 sisters. Please tell me about LTCG. How to save tax.
You will need to calculate long term capital gains tax for the sale. Please read this post for more information . You can save on tax by investing the gains in either residential property or notified capital gains bonds.
What happens to the amount deposited in bonds (NHAI or REC) after 3 years lock-in period:
1. Are we free to use the amount for any other purpose?
2. Does the intrest earned from the deposit are taxable. If so, is it on individual tax slab or some flat %
Only the amount invested is exempted from Capital Gains Tax. The Interest earned on these bonds is liable to income tax. It will be taxed under the head ‘income from other sources’.
I have one query 20 years back we purchased plot and recently we have sold the plot,Now my question is with this amount
i should buy other property or can i use the amount for other purpose.If i use it for other purpose how much is the tax i should pay.
If i use the amount for any medical purpose or for an education whether it is taxable or not.
Tax exemption is available when you invest the capital gains in residential property or capital gain bonds. Please read this post for more information – .
I read the post “How To Save On Capital Gains Taxes When Selling Property”.
I am have purchased house in 2010 at cost 30Lakh and now planning to sell in 50 Lakh. But I need to repay 13Lakh from this to settle my Home loan & purchase New house in 37 Lakh. Pls tell how much will be the capital gain.
Hi Manoj Kale,
From the information that you have given us, there might be a capital loss rather than capital gains. However, we suggest that you get in touch with a financial planner or chartered accountant for clarity.