How To Save Capital Gains Tax On Property?

You might have factored in the amount you have to pay as taxes tax while buying a property. But, did you think that you also have to pay a substantial amount in taxes when you sell a property? Well, you have to pay capital gain tax while selling your property in the country. This tax has to be paid on the profit earned through the transaction.

If you are selling a property within two years of buying, the profit would be treated a short-term capital gain and would be taxed accordingly. If the sale takes place after two years of the purchase, the transaction would attract long-term capital gain tax which is levied at 20 per cent. To draw a rightful conclusion, inflation is factored in while driving the profit a seller earns through the sale of his property. 

Now, what can a seller do to ensure he does not end up paying a large part of profit from the sale as taxes?

Build or buy a new house

According to Section 54 of the Income-Tax Act (I-T Act) , if you buy or acquire a new home from the sale proceeds of the previous property, you are exempted from paying capital gain tax. Since the objective here is to acquire a new home instead of earning profit from the sale, according to Section 54F, the seller can be exempted even if the saleable property is non-residential and the profit gained so is being used to buy a residential property. Moreover, you can buy a new house before one year or after two years using the proceeds of the sale of the old property. This exemption is available only for once and will be withdrawn if you sell the new house within three years.

Invest in bond

For those who already own a house and can't take benefit of Section 54, investment bonds are the best way out. These bonds are exempted from capital gains tax and therefore you can invest the entire proceeds in them. Though the rate of interest is six per cent, it is comparable to fixed deposit rate. Apart from this, you need to invest the capital gains with six months of the realisation. The lock-in period is three years and non-transferrable. Being rated as AAA, these bonds are one of the safest bonds available for saving the capital-gain tax. The minimum investment is Rs 20,000 while the highest permissible limit per financial year is Rs 50 lakh.

Capital gains account scheme

For those who are not yet ready to purchase a new home due to income tax return, the capital gains account scheme is another way out to save. The seller can put money in this scheme for three years and can use the money for constructing a new house. The money so invested should be mentioned in the seller's income tax return. The account can be opened only at scheduled banks and not at cooperative or regional banks. Moreover, there are two types of account: Account A is more like a savings account where you can withdraw the sum according to your own requirement; Account B is more like a fixed deposit. The rate of interest is decided by the Reserve Bank of India and is taxable. Apart from this, the account deposit should be made before filing income tax return for the previous financial year.

With inputs from Thufail PT