How to save on capital gain tax while selling a house
Taxing Issues
House property remains an attractive option for investors due to the quick value appreciation it provides and the roof one gets over the head. But when you sell a house property, the profit you make is termed as capital gain, which would attract tax. It is better to be aware of the basic rules to avoid a huge tax liability and other pitfalls.
One important aspect one must be aware of before selling a property is the timing of the sale. Timing is crucial not just to take advantage of the market situation, but also to make optimum gains from the taxation point of view.
First of all, tax deduction claimed for repayment of a housing loan shall get reversed if the property is transferred within five years from the end of the assessment year in which an individual got possession of the same.
Further, if the property is sold after holding it for more than three years, the seller gets a concessional tax rate on the capital gain, as the long-term capital gain (LTCG) tax is lower than short-term capital gain tax, which is applicable if the property is sold before three years.
Plus, the seller can adjust the cost of the property after indexation to save on capital gains. One can also further invest the capital gain in prescribed capital gain-saving instruments if the property is sold after three years.
Capital gain is the excess of sale consideration over the cost of acquisition, cost of improvement and expenses on transfer. In case of LTCG, the acquisition and improvements cost are recalculated to factor in inflation using notified cost inflation indices. If a property is acquired by way of gift or inheritance, the capital gain will be computed on the basis of the cost to the previous owner. If the property has been acquired prior to April 1, 1981, the acquisition cost will be the cost incurred by the original owner or the fair market value of the property as on April 1, 1981, whichever is higher.
It is important to note that the stamp duty value shall be considered as full value of the sale consideration for tax purposes if the consideration received or accruing as a result of a transfer is less than the value adopted for stamp duty purpose. Further, if the difference between stamp duty value and sale consideration is more than Rs 50,000, then such difference shall be taxed as income in the hands of the buyer.
The tax rate applicable to LTCG is 20 per cent (plus surcharge, if applicable, and education cess) whereas STCG is taxed at normal rates. Capital gain tax-saving avenues are available only against LTCG by way of reinvestment of the capital gain in the following:
>> A residential house property either by way of purchase within one year before or two years after the date of sale or construction of the same within three years from the date of sale. If the investment is not made before the due date of filing the income-tax return, then the gain has to be deposited in a capital gains accounts scheme.
>> Specified capital gain saving bonds (maximum Rs 50 lakh per tax year) within six months from the date of the transfer.
Tax break is also available for reinvesting the entire net consideration in equity shares of an eligible company, which utilises the said investment for purchase of capital asset within the prescribed period before the due date of filing tax return.
If the entire capital gain or net sale consideration, as the case may be, is not invested, then only proportionate LTCG would be exempt from tax. Tax benefits of such exemptions could be reversed on account of non-compliance with any of the prescribed conditions for availing the said exemption.
Thus, it is important to consider the above provisions of law in order to save tax on the sale of a house property.
- by Homi Mistry is a partner and Pallavi Dhamecha is manager with Deloitte Haskins & Sells
Source:- Financial Chronicle
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