When you make a gain on the sale of a house, you have to pay a tax on your gains. If three years have passed, between the date of purchase and sale of an asset, then, your gain from the sale will be classified as a long-term capital gain. If three years have not elapsed, your gain will be treated as a short-term capital gain. Long-term capital gain is taxed at the rate of 20%, while short-term capital gain is taxed at your marginal tax rate.
You are entitled to avail of indexation benefit on long-term capital gains. If you bought a property in 1994-95 at Rs 20 lakhs and sold it in 2015-16 for Rs 1 crore, your long-term capital gain will not be Rs 80 lakh. Instead, it will be calculated as follows:
Capital gain = Selling price – Indexed cost of acquisition.
Indexed cost of acquisition = Purchase price x (Index in year of sale/Index in year of purchase).
Now, the index in 1994-95 stood at 259 and in 2015-16 at 1,081.
Hence, your indexed cost of acquisition will be = 20 x (1081/259) = 83.48
Your long-term capital gain will be = 100 – 83.48 = 16.52 lakh.
Reinvesting in a property
Under Section 54 of the Income Tax Act, you don’t have to pay any tax on long-term capital gains, if you invest your gain in another property. However, there are a few preconditions. Firstly, this benefit is available only to an individual or an HUF (Hindu United Family). Secondly, your gain must be invested in another residential property and not in some other asset. Thirdly, you must invest in the second property, either one year before or within two years of the sale of the first property. If you are constructing a new house, its construction must be completed within three years from the date of sale of the first property. Lastly, the government has now restricted this exemption to only one residential property.
“You can’t avail of the exemption under Section 54, if you sell your house after holding it for less than three years,” cautions Jatin Khemani, managing director of New Delhi-based Stalwart Advisors. Moreover, the amount that is eligible for exemption will be the lower of the two – the capital gain arising from sale of the first property, or the amount invested in the second property.
If you avail of the benefit under Section 54, you can’t sell the second house within three years from the date of its purchase or from the date of completion of its construction. “If you sell the house in less than three years, then, the amount claimed as exemption under Section 54 will be deducted from the cost of acquisition of the new house,” explains Manish Saluja, a New Delhi-based certified financial planner.
To boost the ailing real estate sector and make it more attractive, the government has reduced the holding period, from the present 36 months to 24 months, in case of immovable property, being land or building or both. These will now be qualified as long-term capital assets.
If, till the date of filing one’s income tax return, the capital gain is not utilised to purchase or construct another house, then, you must deposit the unutilised amount in a Capital Gains Deposit Account in any public sector bank. The new house can be purchased or constructed, by withdrawing the amount from this account within the specified time limit.
Invest in specified bonds
Section 54EC also provides for exemption on capital gains tax, if the amount is invested in the bonds of Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI). The investment must be made within six months of sale of the property. One can invest up to Rs 50 lakhs in these bonds, which have a tenure of three years.
In order to widen the scope of this clause, the government, in its Finance Bill 2017, proposed that such investments can be done in any bond redeemable after three years, which has been notified by the central government in this behalf. Such investments will also be eligible for exemption. However, this amendment will take effect from April 1, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.