An important part of planning to sell a house property is the tax planning for your capital gains. Lets take a detailed look at the how income tax treats your capital gains and various options available to you, if you are planning to sell your house or have recently sold one.
Sale of a property usually results in considerable gains. Lets take an example – assuming you bought a house in the year 2004 for Rs 50lakhs and this house is now worth Rs 1.5cr. Since property is a long term asset when held for more than 3 years, cost price will be indexed for calculating capital gains. You can adjust the cost price for the impact of inflation, reduce from Rs 1.5cr, the inflation adjusted value of Rs 50lakhs.Therefore Rs 50lakhs x CII for 2014-15/CII for 2004-2005 or Rs 50lakhs x 1024/480 = Rs 1.06cr is the adjusted cost of the house. Your net capital gains are Rs 1.5cr less Rs 1.06cr or Rs 44lakhs. You can reduce certain expenses too from your gains which are directly related to the sale or transfer of the asset.
In case you have inherited or acquired the property through a will or a gift or on your wedding – the cost to the previous owner shall be the cost for you and you are allowed to index this cost as per the year of purchase of the previous owner. Since CII indices are available beginning 1981, in case property was acquired before 1981 you can take either take the actual cost of acquisition or use the fair market value of 1981.
Long term capital gains are taxed at 20%, therefore assuming you have a capital gains of Rs 44lakhs, your tax outgo on these gains shall work out to Rs 8.8lakhs, which is a significant amount. Fortunately, you can avoid paying taxes on this amount. Let’s see how –
By Purchasing Another Property – The Income tax act allows you to reduce your capital gains to the extent these have been invested in purchasing a new house property. Please note – you do not have to invest the entire sale receipt, but the amount of capital gains. Of course, your purchase price of the new property may be higher than the amount of capital gains, however your exemption shall be limited to the total capital gain on sale. Also, you can purchase this property either one year before the sale or 2 years after the sale of your property. You are also allowed to invest the gains in the construction of a property, but construction must be completed within 3 years from the date of sale. In the Budget for 2014-15, it has been clarified that only ONE house property can be purchased or constructed from the capital gains to claim this exemption. Do remember that this exemption can be taken back if you sell this new property within 3 years of its purchase.
By Investing in Capital Gains Account Scheme –Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time consuming process. Fortunately, the Income Tax agrees with these limitations. If you have not been able to invest your capital gains until the date of filing of return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it. However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.
Purchasing Capital Gains Bonds – What happens if you do not intend to purchase another property, there is no use of investing the amount in a Capital Gains Account Scheme. In such a case, you can still save the tax on your capital gains, buy investing them in certain bonds. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. Note that you cannot claim this investment under any other deduction. You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50lakhs in a financial year in these bonds.
We hope this comes in handy when you are expecting capital gains, if you need help do reach out to us cleartax.in and we will be happy to assist you!