The sale of a property invites a tax named the capital gain tax which is levied on the capital gain that is received on the sale of a capital good. The land is a capital good and has appreciable value, hence is taxable. If you sell a property before holding it for a period less than two years then you will be taxed according to the short term capital gain tax basis. According to this category, the sale amount is added to your total income for the year in which the sale of the property is taking place after subtracting the cost of the property, renovation, and expenses incurred in the sale of the property.
On the other hand, the long term capital gain tax is levied when you sell your property after holding the property for more than two years. It is calculated after adding a 20% indexation. The payable amount is generally in some lakhs and may be cumbersome. This amount can be saved if the seller reinvests the capital gain he earned in full into bonds or other property according to the provisions of Section 54 of the Income Tax Act. This exemption is possible only for the long term capital gains and not for short term capital gains.
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How often can you exclude capital gain tax from the home sale?
The liability to pay capital gain tax arises from the transfer of the capital asset. The seller should pay capital gain tax in case of sale. The seller is not required to pay capital gain tax in case of gift and inheritance. Under the exemption provided under the section of the Income Tax Act, a person can be exempted from his liabilities if he invests the entire amount that he received as capital gain into a property. Before the budget of 2019, a person could only invest in one house and now it has been increased to two houses.
What percentage is capital gain tax on real estate?
As already mentioned, the capital gain tax is calculated under two categories such as the Short term Capital gains and long-term capital gain. In the case of short term capital gain, the tax amount is deducted on the net short term capital gain obtained after deducting the cost of the property, renovation, and expenses incurred in the sale of the property from the total sales price of the property. The net capital gain is then added to the total income. The Income Tax Law has divided different slabs based on the individual’s income level. The income tax slab goes as below:
In case the tax is payable on the long term capital gain basis, then the Cost Inflation Index needs to be considered. The Cost Inflation Index is announced at the end of every financial year. To calculate the long term capital gain, the seller will have to reduce the indexed cost from the value of the property at which it is sold. At present, the Cost Inflation Index is 20.8% and the selling price is taxed after deducting 20.8%.
How do you avoid capital gain tax on a primary residence?
The capital gain tax on the sale of a primary residence held for a period of fewer than two years cannot be avoided. On the contrary, the property sold after being held for more than 2 years can be exempted according to the Income Tax Act under section 54 and 54EC. However, there are certain conditions to avail the exemption and is provided in the table below:
| Parameters | Under Sec. 54 | Under Sec. 54EC |
|---|---|---|
| Who may claim? | Individual or Hindu Undivided Family | Individuals or Hindu Undivided Family |
| Eligibility of the Asset sold | A residential property that has been held for a period of a minimum of 2 years. | Land, building or both |
| Assets to be acquired for exemption | Two residential property after the budget of 2019 for a value of Rs. 2 crore rupees | Can be availed by investing in a certain species which is redeemable after five years and which has been notified by the Central government. The specific bonds include under section 53EC are the National Highway Authority of India, Rural Electrification Corporation, etc. |
| The time limit for investing in the new property | The new property can be purchased one year ahead of the sale of the old property. The new property can also be bought within two years of the sale of the property. The Income Tax provides a three years period for acquiring a new property in case of a property under construction. | A period of six months after the sale of the property is granted to the seller to invest the capital gain in the bonds. |
| Exemption amount | The entire capital gain received from the transfer of the property needs to be availed to obtain a complete exemption from the tax. If the seller reinvests only a part of the capital gain, then the only partial exemption is granted. | Same as under section 54 of the Income Tax Act. |
| Capital Gain Deposit Account Scheme | The Capital Gain Deposit Account Scheme is applicable under section 54 of the Income-tax Act. Capital Gain Deposit Account Scheme is a scheme which is made available to the seller if he fails to re-invest the capital gain within the specified time. | Capital Gain Deposit Account Scheme is not applicable under Section 53EC of Income Tax Act |
Do you pay capital gain tax after age 65?
The direct answer to this question is yes. You are liable to pay capital gain tax on the sale of the property after the age of 65. Any property in the holding of the seller for a period of more than two years is treated as long term and taxable only after the deduction of the Cost Inflation Index, which is currently at 20.8%.
Assuming the fact that you are a senior citizen with zero income, you are eligible for an exemption of the long term capital gain tax to an extent of Rs. 3 lakhs which is provided under the Income Tax Act. The remaining amount is taxable under the Income Tax Act. You can also avail of the benefit provided under section 54 and section 54EC of the Income Tax Act.
Conclusion
Summing up, it is to be stated that the capital gain tax can be avoided by reinvesting the capital gain earned in the sale of a property. The reinvestment can be made in a residential property or specific bonds prescribed by the central government. The short term capital gain tax is added to your total income and the taxable amount is determined based on the Income Slab you fall under. In the case of long term capital gain tax, the Cost Inflation Index (CII) is determined by the authorities and published every year. The current CII is 20.8%. You may also avail of deductions in the tax amount after considering your age.
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