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.
Indexation
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!