Tax saving on selling a property in India: Selling a house for profit is a big decision. But not handling the tax implications efficiently could reduce the profits
Tax saving on selling a property in India: Selling a house for profit is a big decision. But not handling the tax implications efficiently could reduce the profits. As per Income Tax Rules, any gains arising from the sale/transfer of a residential property is subject to capital gains tax depending upon the period of holding.
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If you have held a property for a period of more than 24 months, the gains arising from the sale of such property would be taxed as long-term capital gains at 20% under Section 112 of the Income Tax Act 1961, according to Dr Suresh Surana, Founder, RSM India.
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However, if the house property is held for a period of up to 24 months, it would be taxed as short-term capital gains as per the marginal slab rates applicable to the taxpayer.
The tax expert says that there are some provisions of the Income Tax Act that provide for certain tax exemptions, which you can avail to reduce tax liability from capital gains tax while selling a residential property. These exemptions can be availed by way of investing the proceeds/gains in certain specified assets subject to specified conditions.
Section 54: Exemption for investment in residential property in India
“Section 54 of the Income Tax Act provides that an individual or HUF may claim tax exemption on long-term capital gains arising from a house property by way of investing the capital gains in one residential property in India,” says Dr Surana.
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“For claiming the exemption, such new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of old house or should be constructed within a period of 3 years from the date of transfer of the old house,” he adds.
This means you can claim tax exemption if you buy a new residential property within 1-2 years after selling the old property. The exemption can also be claimed if you construct a new house within three years from the date of selling the old house.
Taxpayers should note that such exemption can be claimed only in respect of one residential house property purchased/constructed in India.
However, if the long-term capital gain is up to Rs 2 crore, the taxpayer can avail of a once-in-a-lifetime option of acquiring two house properties within the above time limit.
3-year lock-in
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If you have claimed an exemption on purchasing or constructing a new house after selling an old property, you cannot sell the new property for 3 years.
“Further, the new house property would be subjected to a lock-in of 3 years. If a taxpayer claiming exemption u/s 54 of the IT Act transfers the new house within 3 years from the date of its acquisition/completion of construction, then the benefit granted u/s 54 of the IT Act will be withdrawn and accordingly, the cost of acquisition of the new assets would be reduced from the exempted capital gains,” says Dr Surana.
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How much exemption can be claimed under Section 54
As per the tax expert, the exemption under section 54 will be lower of the following:
- Amount of capital gains arising on transfer of residential house; or
- Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)
- With effect from FY 2023-24 i.e. AY 2024-25, the Finance Act 2023 has capped the limit of investment in new house property to Rs 10 crore for the purpose of claiming deduction u/s 54 of the IT Act.
Section 54EC: Exemption for investment in certain specified bonds
As per Section 54EC of the Income Tax Act, an individual or HUF can claim tax exemption from long-term capital gains from house property by way of investing such gains in certain specified bonds within six months from the date of transfer of house property.
Investments in the following bonds are eligible for exemption from LTCG on house property under Section 54EC of the IT Act:
- Rural Electrification Corporation Limited or REC bonds
- Power Finance Corporation Limited or PFC bonds,
- Indian Railway Finance Corporation Limited or IRFC bonds.
- Investing in the National Highway Authority of India or NHAI bonds was also eligible for exemption. But this is no more a feasible option as such bonds are discontinued from 31st March 2023, says Dr Surana.
5-year lock-in
Any investment in the above bonds would be subjected to a lock-in period of 5 years for claiming LTCG exemption after selling a house.
“In case the taxpayer availing exemption u/s 54EC transfers or converts such bonds into money within 5 years from the date of its acquisition, the exempted capital gains would be subject to tax in the year of transfer/ conversion,” says Dr Surana.
How much exemption can be claimed under Section 54EC
Taxpayers can claim exemption up to the lower of the amount of capital gains or investment in specified bonds. The maximum investment amount is restricted to Rs 50 lakh.
