Have you Sold your Residential Property, Wants to know various things to save the Tax ?

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, let’s look at some of the ways that we as people, may save money on taxes while selling our homes and make the most of prudent tax planning.

👉 Section 54

Under Section 54 of the Income Tax Act, The Long Term Gain arising from the sale of house property can be exempted.

For example, Mr Sharma bought a house on 1 May 2019, worth ₹1,00,00,000 and then sold it on 1 April, 2022 for ₹1,20,00,000. Realising a capital gain of massive 20 lakh rupees. Which, according to the IT act, would amount to a mammoth tax of ₹4,00,000.

But Mr Sharma is a clever individual who had done his tax planning beforehand. So to claim deduction u/s 54, he bought a residential house in another locality for the same ₹1,20,00,000. This allowed him to use the entire receipt in buying of a new Residential House, and he is exempted from the Rs. 4,00,000 tax that he would have to pay if he had not bought the new house.

Clever Mr Gupta

Let us now find out the conditions that we need to make sure of while selling an old property and buying a new house property to claim deduction u/s 54 –

1. The sale of property must result in a Long Term Capital Gain
2. Investment in a new House must be a residential property
3. The new house must be situated in India.
4. The new house should have been purchased one year before or two years after the date of sale of the property.
5. Amount of capital gains should be deposited in the capital gains account scheme if the new house is not brought in the present Financial Year.

If the entire capital gains are not utilised in buying a new house, then exemption is provided in that proportion.

👉 Capital gain account scheme

We may not want to buy another house quickly after selling one for a variety of reasons, including the belief that the housing market is now overpriced or the fact that we do not like any house currently on the market. However, if you desire to do so in the future, how will you be able to keep that money without paying taxes on it?

If you intend to buy a house with the proceeds from a sale in the future, the government permits you to park your capital gains in your bank’s Capital Gain Account Scheme, where it will earn interest and can only be used to buy a residential house later.

👉 Section 54EC

There are some specified investment instruments in which an individual can park their capital gains realised from the sale of any property within six months from the date of sale. These Fixed Income Instruments give an interest rate of around 5-6%, and this interest income is liable to tax.

These fixed income instruments have a lock-in period of 5 years and a maximum limit of investment of Rs.50,00,000 in a single financial year.

Instruments on which the exemption u/s 54EC is available-

1. Rural Electrification Corporation Limited or REC bonds,
2. National Highway Authority of India or NHAI bonds,
3. Power Finance Corporation Limited or PFC bonds,
4. Indian Railway Finance Corporation Limited or IRFC bonds.