Tax Implications Of Home Sale And How To Make The Best of It

Selling a residential plot in India is an emotionally challenging proposition, no matter how much you adore the new one that you are going to move in. While you may have fixed a price keeping all the overheads in mind, if you have overlooked the tax implications it might not be the best deal. Here's what you have to look out for to turn it into a profitable situation:

Paying duties: While calculating the profit on sale, you must also take into account the deduction for brokerage to the realtor. If you are planning to purchase one of the upcoming apartments in India, and zero-in on a property of Rs. 50 lakh as your second home, allow for an 8% duties payable in the form of brokerage, registration fees and stamp duty.

Wealth tax: If the home being sold falls under the category of resale apartments in India, and is your second home, 1% wealth tax is payable on the total wealth above the amount of Rs. 15 lakh. Since the total wealth also includes cars, gold and other assets, chances are most likely that the total wealth will be way beyond Rs. 15 lakh.

Capital gains: Since investment in real estate is considered as an asset, any profit made by the sale of it comes under the purview of capital gains. You might be tempted to sell off your home if you get a decent offer but there are things that you must consider to make the offer profitable in reality. A sale within three years of purchase is considered short-term capital gains and is added to the income. It is subjected to the slab rate and taxed accordingly. However, if you manage to hold on for at least three years, the sale becomes a long-term one and you can enjoy various tax exemptions as well. For long-term capital gain, a 20% tax is applicable after indexation.

While calculating the capital gains, deductions are made on stamp duty/registration charges, interest on loan for financing the first home (if the tax benefits have not been claimed already) and any expenses incurred in renovating the flat. The amount remaining after these deductions will then be eligible for tax purposes.

Making profit out of the gains: You are eligible for tax exemption on long-term capital gains under Section 54 (F) of the IT Act of 1961 if you use the full amount of proceeds from the sale to buy a home within two years or build a new one within three years. If you had already bought the second home before the sale of the first, don't fret. The tax exemption is still valid if the purchase was made within a year of the sale. The only thing to watch out for here is that the exemptions are valid only if you don't hold the ownership of two homes at the same time.

If you are not interested in investing in a second home, you can still avail the benefits by investing the entire amount in bonds instead. Investing in the bonds issued by Rural Electrification Corporation and National Highways Authority of India allows you to claim exemption under Section 5(4) EC of the IT Act. However, this investment limit is fixed at Rs. 50 lakh during a financial year.

In today's world, information is power. While experts are available to guide you on the nitty-gritty of all the aspects related to real estate, it pays to have the basics in place.