Income Tax: How to save capital gain on sale of house property

Save capital gain on sale of house : Taxes are something that no one enjoys. But what if I told you that there are some simple ways to save money on taxes while selling your most valuable asset, your own ‘house’? Yes, there are some exemptions available to you under the Income Tax Act that allow you to earn a tax break on the sale of your home.

What is Capital Gains Tax?

The profit realised on the sale of an asset for a consideration value greater than the asset’s purchase price is referred to as capital gains. And the tax applicable on such gains is called capital gains tax. The capital gains on the sale of a property can be calculated using a simple formula. The capital gains realised is calculated by subtracting the purchase price, stamp duty, improvement costs, and any other charges associated with the property from the net consideration price.

Read Also: Income Tax on sale of listed shares in short term : Capital gain

Types of capital gains

There are two types of capital gains-

1. Short term Capital Gains (STCG)- If a property is sold within 24 months from the date of its purchase date, the gain realised on the sale is referred to as a Short Term Capital Gain, and the tax on that gain is known as Short Term Capital Gains tax. In the event of a property sale, STCG is applied at the Assessee’s tax slab rate. STCG is added to the Assessee’s total income and taxed according to the tax slab in effect at the time of the Assessment Year.
2. Long Term Capital Gains (LTCG)- If a property is sold after 24 months from the date of purchase, the gain realised on the sale is known as Long Term Capital Gains, and the tax imposed on such gain is known as Long Term Capital Gains Tax. When a property is sold, LTCG is computed after providing the advantage of indexation, which adjusts the purchase price for rising inflation and then calculates capital gains. The LTCG is then taxed at a fixed rate of 20% plus a 4% cess, for a net rate of 20.8 per cent on the LTCG.

Read Also: Income Tax Rules on Capital Gains – Types, Tax rates, computation, exemption

Methods to save capital gain on sale of house

As a residential property is the prime asset of most individuals living in India, taxes paid on its capital gains can be heavy and discouraging to sell it.  However, the government has granted some incentives, including exemptions from capital gains tax on the sale of residential property. It has incentivised new-home buyers by allowing the entire purchase price to be tax-free in certain circumstances. 

Today, Lets see how an Individual can claim exemption where Asset sold is Residential Property and make the most of prudent tax planning.

Particulars	Section 54	Section 54EC	Section 54GB
New Asset Purchase	1. Residential House Property in India, or 2. If LTCG is upto 2 cr, then assessee can acquire two Residential House Property. This benefit is available once in lifetime.	Bonds redeemable after 5 years issued by- 1. National Highway Authority of India (NHAI) 2. Rural Electrification Corp. Ltd. (REC) 3. Power Finance Corp. Ltd  (PFC) 4. Indian Railway Finance Corp Ltd (IRFC)	Subscription in equity shares of eligible company which uses the amountwithin 1 year from date of subscription for purchase of new asset (P&M). (Read Note 6)
Time Limit	Purchase: Within 1 year before or 2 years after the date of transfer, and Construction: Complete within 3 years after date of transfer	Within 6 months from the date of transfer of asset	Shares should be subscribed upto due date of return filing.
CG Deposit Scheme	Applicable	Not Applicable	Applicable (for Company)
Amount of Exemption	Lower of: Capital Gains made, orCost of New property/ Deposit made in scheme	– Lower of: Capital Gains made, orInvestment made in bonds – Maximum Rs 50 Lakh	(Cost of New Plant & Machinery X Capital Gains) Net sale Consideration
Lock In Period	3 years from date of purchase or constructed	5 years  from the date of its acquisition	5 years from date of subscription or acquisition. In case of computer and computer software acquired by eligible Startup restriction of 3 years apply.
Consequences of mis-utilisation	Amount of exemption becomes fully taxable	The amount of capital gain exempt will be fully taxable	Full exempt capital gain will be taxable.
Remark	The no. of houses already owned by the person is immaterial.	If the Assessee even takes a loan or advance on the security of such long term specified asset, he shall be deemed to have converted such long term specified asset into money on the date on which such loan or advance is taken. The Principal invested becomes tax free after the lock-in period but the interest continues to remain taxable.

Some Important Points to Note:

1. Tax saving can be done by using 2 sections at a time as well. Like,if the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately under section 54. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.
2. If you are unable to reinvest the gains in another house or bonds before filing your tax return for the year in which the sale took place, deposit the balance in the Capital Gains Account Deposit Scheme so that you are eligible for the deduction.
3. CG Deposit Scheme means if the asset is sold in the PY, and the seller intends to, but is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns. The amount already incurred towards purchase/construction along with the amount deposited in the capital gains account scheme can be claimed as cost while claiming the deduction. If you withdraw funds from this account, they have to be used within 60 days.
4. While calculating capital gains, expenses related to transfer / sale like advertisement expenses, brokerage expense, Stamp duty, Sale deed registration fees, Legal (lawyer) expenses etc., can be deducted from the Purchase price.
5. The new property must only be bought on the name of the seller and not on anybody else’s name. Joint ownership can be acceptable but exemption can be limited to the share of ownership.
6. Section 54GB, some useful definitions –

Read Also: Income Tax for NRI- Which Income in India is taxable and its tax rates

• Meaning of Eligible Company:

“Eligible company” means a company which fulfils the following conditions, namely:—

1. it is a company incorporated in India during the period from the 1st day of April of the previous year relevant to the assessment year in which the capital gain arises to the due date of furnishing of return of income under section 139(1) by the assessee;
2. it is engaged in the business of manufacture of an article or a thing or in an eligible business;
3. it is a company in which the assessee has more than 50% share capital or more than 50% voting rights after the subscription in shares by the assessee; and
4. it is a company which qualifies to be a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006 or is an eligible start up.

• Meaning of “Eligible Start Up”

“Eligible start-up” means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:—

1. it is incorporated on or after the 1st day of April, 2016;
2. the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2022; and
3. it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.

Note.—Since eligible company also means “eligible start up”. Investment in LLPs shall also be eligible for exemption under section 80GB provided it carries on an eligible business.

• Meaning of “Eligible Business”

“Eligible business” means a business which involves innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property

• Meaning of new asset “New Asset” means new plant and machinery but does not include—
  • any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person;
  • any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house;
  • any office appliances including computers or computer software;

Provided that in the case of an eligible start-up, being a technology driven start-up so certified by the Inter-Ministerial Board of Certification notified by the Central Government in the Official Gazette, the new asset shall include computers or computer software.

• any vehicle; or
• any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any previous year.