How to deal with tax and ITR filing when selling a property

selling a propertySelling a property: Tax on capital gain is triggered when a person transfers (by way of sale, exchange, conversion, relinquishment of right) any capital asset (such as house, land, building, equity shares, mutual funds etc.) and derives profit from such transfer. The seller of a property is liable to pay income tax if the sale of property has led to capital gains. Even though the seller cannot claim common deductions such as sections 80C, 80D etc. to reduce their tax burden, there are certain other ways to save income tax on capital gains derived from sale of property.

The capital gains on property sales trigger the tax implications in India. Suppose you sold a house or property inherited from your parents as a gift. Then such type of succession asset is eligible for tax exemption. No tax applies to it. But when you sell such inherited house or land or property that you have purchased your own in the past, then that type of capital gain is also not eligible for tax exemption. As it is not tax-free in India.

What are taxes on capital gains on property sales?

Taxpayers can estimate their capital gains on selling real estate property based on the holding property investment. It can be divided into two types: short-term CG and long-term CG.

  1. Short-term Capital Gain on property sale
    The short-term capital gain on property sale is the profit earned on the transfer of a property owned for two years or less.
  2. Long-term Capital Gain on property sale
    The Long-term capital gain on property sale is the profit earned on the transfer of a real estate property owned for more than two years.

Differentiate the short-term and long-term capital gains to evaluate your income tax on selling a house, flat, or any other immovable property.

Capital Gain Tax Rates on Property Short Term Long Term
Condition When the property owner sold a property after holding it for less than 2 years When the property owner sold a property after holding it for more than 2 years
Real Estate Slab Rate 20% with indexation

Examine in which condition you lie. For example, suppose you have sold a house or property that you have been holding for less than two years. Then it will count in your gross total income for that financial year at the time of e-filing of your ITR. The taxes will be applicable according to the tax slab in which it will lie. Whereas if you’re sold a property after holding it for more than two years, a 20% tax rate is applicable. However, this rate does not include the indexation used to analyze the purchase price of the sold property. Likewise, it reflects the consequences of inflation on the sale.

Read also: Income tax on inherited income: Is money from inherited income taxable in India?

All those who have sold or transferred an asset and reinvested the proceeds in a new residential property can avail tax benefits under Section 54F. The important point to remember here is that the amount received should either be reinvested one year before the sale of the property or used to purchase property within two years of sale or used to construct one within three years of the sale.

The exemption applies to long-term capital assets that are held for over 24 months. And in case of real estate – the holding period must be 36 months or more.

Provisions of section 54 are applicable to the sale of residential property while section 54F applies to all capital assets other than residential property, such as gold, equity shares, and non-residential property.

After sale, the amount exempted under Section 54 will be the lower of the capital gain or the investment made in the new property.

For example, if a person purchases a residential property for Rs 30 lakh and sells it for Rs 80 lakh — making a long-term capital gain of Rs 50 lakh. So, if they then purchase a new property for Rs 40 lakh, the remaining Rs 10 lakh would be taxable under the applicable capital gains tax rate.

Similarly, if they bought gold worth Rs 20 lakh and sold it for Rs 90 lakh, then their profit and the long-term capital gain would be Rs 70 lakh. And as per Section 54F, they can claim tax exemption by using the entire proceeds of the sale —  Rs 90 lakh — to purchase a residential property within the specified time frame.

If they’re unable to use the proceeds towards reinvestment within the same financial year then the proceeds from the sale must be kept in a Capital Gains Account scheme to claim tax benefits.

Rules related to residential property 

An important condition for availing the exemption is that at the time of the sale of the original asset, the taxpayer should not own more than one residential house other than the new property.

In Budget 2023, the finance minister announced a deduction cap of Rs 10 crore for capital gains on investments in new residential properties.

To summarise, Section 54 focuses on long-term capital gains derived from the sale of a residential property. Whereas, Section 54F caters to long-term capital gains obtained from the sale of any asset other than a residential property. If these gains are reinvested in a new residential property, tax benefits can be claimed. And the exemption amount is determined by the lower value between the capital gains or the investment made in the new property.

It’s important to note that the exemptions on capital gains tax can be claimed by the individual taxpayer as well as the Hindu Undivided Family (HUF).

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