The most sought form of investment is the investment in residential properties. The main reason for this is because everybody has a dream to own a house and a residential property is a capital asset from the point of view of tax. Land is one of the capital assets that is also an appreciated asset but agricultural properties in rural areas are not considered as capital assets. Thus a landowner can make huge profits by the sale of the property or properties other than agricultural properties in the rural area.
The profit or loss earned on the sale of a property is used for levying or deducting tax in your income tax returns. Any profit earned in the sale of the capital asset is termed as a capital gain. This profit is treated under the ‘income head’ and is taxable for the year in which the sales transaction is being carried out and this tax is called the capital gain tax.
The capital gain tax can be for a short term basis or a long term. It is important to note that capital gain is only applied for the sale of the property and not in cases of property transfer such as inheritance, gift, will, etc. However, the property becomes taxable when it is sold.
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How do I calculate capital gains on the sale of the property?
As already stated above the capital gain is the profits that an individual makes out of the sale of a capital asset which could be a residential property or commercial property for a price greater than the price at which the property was acquired. The rates that are levied varies based on an individual’s tax brackets and can vary between 0%, 15%, or 20%. The calculation of the capital gain can be classified as short term and long term capital gains. When the sale of the property is held for 24 months (2 years), then it falls under the category of short term capital gain and when the sales transaction extends for more than two years, it is called the long term capital gain.
The short term capital gain can be calculated by deducting the sum of the purchase price, expenses incurred in the sale, and cost of renovation from the total sales price, i.e.:
Then further this amount is added to your taxable income.
The formula for the long-term capital gain is calculated in a similar way however a cost called ‘Index Cost of Improvement’ or Indexed Cost of Acquisition” is deducted from the sales price of the property. This indexation cost is obtained by applying the cost inflation index and this will increase your cost base or lower the gain as the purchase price gets adjusted for the impact of inflation.
The short term capital gain is included in the individual’s income tax and varies according to the slab under which he falls and on the other hand, long term capital gains are charged at 20%.
How can I avoid capital gains tax on a home sale?
The amount that needs to be furnished for the sale of a property as the capital gain can be a good amount which is generally in 6-digits. However, there isn’t much relief available for the short term capital gain tax but there are legal provisions that can help you in saving the long term capital gain tax. Some of these provisions are listed below.
Section 54 of the Income Tax Act:
Section 54 of the Income-tax Act provides you benefits when you sell one property and purchase another property. It can be further explained as the gain that as the exemption that is granted to the owner of the property when he sells one of his property and uses the capital gains for the purchase or construction of another house (maximum two houses).
The exemption for the purchase of two houses was granted after the budget of 2019. It is also important to note that the proceeds or gain should not exceed ₹2 crores to obtain the exemption under section 54 of the IT Act and this benefit can only be claimed once in a lifetime.
To claim the exemption on the entire capital gain, you are required to reinvest the entire amount. If only a part of the long-term capital gain is invited then the benefit can be availed only for that amount that has been reinvested. If the person who has availed of these benefits sells the new house within three years, then the benefit received under section 54 will be reversed.
The purchase of the new property should also be carried out within one year before the sale of the property or within two years of the sale of the property. In case of construction of the house, it needs to be completed within three years of the sale of the property.
In cases of the person’s inability to reinvest, the person may deposit the amount in a capital gains account scheme (CGAS), otherwise, it becomes taxable. The section is also applicable if the person uses the gain to repay his home loan or avails a home loan for investing in the new house.
Section 54 EC
This section applies to those that are not willing to invest their money in real estate. They can save themselves from the capital gain tax by investing in certain specific bonds such as bonds issued by the National Highway Authority of India, Rural Electrification Corporation, etc. The exemption applies to residential and non-residential property and you get six months to invest in bonds. However, after the budget in 2019, the section applies only to the real estate properties, and the maximum amount permitted is ₹ 50 lakhs with a lock-in period of five years.
Section 54F
The provisions of Section 54F provides exemptions on long term capital gain other than the residential house in cases wherein the amount is invested in carrying out the purchase or construction of the new residential property. The exemption is applicable to individuals as well as the Hindu undivided family. It is available on the transfer of any Long Term Capital Asset other than a residential house.
At what age can you sell your home and not pay capital gains?
The levying of capital gain does not have an age consideration. Thus anybody that has resided in the house for more than 2 years is eligible for exemption under section 54 of the Income Tax Act. The section provides an exemption of capital gain tax by reinvesting them in residential property or by investing in certain specified bonds such as the National Highway Authority of India, Rural Electrification Corporation, etc.
Assuming the fact that you are a senior citizen with zero income, you are also eligible for an exemption of the long term capital gain to an extent of Rs. 3 lakhs which is provided under the Income Tax Act. You are taxable for the remaining amount. Senior citizens have benefits in western countries according to the over-55 home sale exemption scheme.
How does buying and selling a house affect your tax return?
The buying and selling of the house should be carried out carefully. If the property is sold within two years then it is treated as a short-term capital gain. The gain is added to the individual’s total income and is taxable according to the tax slab he falls under. If the house is sold within 5 years from the end of the financial year in which the property was purchased, then the tax exemptions such as the claim on the principal repayment, stamp duty, and registration under Sec 80C are reversed and becomes taxable in the year of sale. The only exemption or benefit that will not be reversed is the deduction in the interest payment under Section 24B.
The property that is sold after two years of purchase is taxable as a long-term capital gain. It is generally charged at a rate of 20% after indexation. Indexation is considered after taking into account the inflation rates during the time in which the property was held by the seller. This is then adjusted to the purchase price and thus helps in reducing the tax burden. However, for long term capital gain, the law has certain exemptions that are stated above.
The government has also made it mandatory for the buyer to deduct the amount payable as TDS when they buy a property that has a value of Rs. 50 Lakhs. An amount equivalent to 1% of the property’s value is deducted from the amount that is payable to the seller. The amount needs to be deposited within 30 days from the end of the month on which the transaction has taken place.
The amount is reflected in the seller’s Form 26AS under the head ‘Part F’ as it is linked to his PAN card. The seller can demand a refund if he avails any exemptions under section 54 of the IT Act or if he incurs a loss on the transaction. The buyer is also expected to furnish an amount as the stamp duty tax at the time of the registration of the property.
Conclusion
Summing up, it is to be stated that while you sell a property there is a sum that needs to be furnished as Capital Gain Tax. It is an amount that is taxable on the capital assets and land of them. It is taxable based on two classifications called Short Term Capital Gains and Long Term Capital gain. There are no benefits at present on Short Term Capital Gain Tax. Section 54 of the Income-tax Act lists certain exceptions to the seller when the property is sold under the classification of Long Term Capital Gain. These exemptions are also granted without any age restrictions.
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