Are you wondering about the impact on your taxes after the government’s recent View this change in the capital gains tax regime for real estate? Well, homeowners will now have the choice of two tax rates on long-term capital gains: a 12.5% rate without indexation or a 20% rate with indexation advantage.
Selling a property can be a significant financial transaction, but it’s important to understand that it may also attract capital gains tax. However, there are several strategies you can employ to reduce the tax burden and save more of your hard-earned money. In this article, understand what is capital gains tax on property and explore various methods to save on capital gains tax when selling a property.
What is Capital Gains Tax on Property?
Capital gains tax on property is a tax imposed on the profit earned from selling an asset. When you sell a property for more than its purchase price, the difference between the selling price and the cost of acquisition is considered as capital gain. This gain is subject to taxation according to the prevailing tax laws in India.
Different Types of Capital Gains
There are two types of capital gains: short-term (STCG) and long-term (LTCG). The period of holding determines whether the gain is short-term or long-term.
Short-term Capital Gains (STCG): Property sold within two years of acquisition is taxed at 20%.Long-term
Capital Gains (LTCG): Property sold after holding it for more than two years is treated as a long-term capital gain. Currently, LTCG on property sales is taxed at a flat rate of 20%, with indexation benefits available or at 12.5% without indexation benefits.
Strategies to Save Capital Gains Tax on Property Sales
- Joint Ownership
If you co-own a property with someone else, you can divide the capital gains from the sale among the co-owners based on their ownership share. This allows each co-owner to use their basic exemption limit and potentially reduce the overall tax liability.
Example:
Mr. and Mrs. Patel jointly own a property that they purchased ten years ago for ₹40 lakhs. They decide to sell it for ₹1 crore. Since they are equal co-owners, they divide the capital gains equally between them – ₹30 lakhs each.
They can claim exemptions up to ₹1.25 lakhs each, totalling to ₹2.5 lakhs on their respective gains, for tax savings and reducing their overall tax liability.
- Reducing Selling Expenses
Certain selling expenses, like renovation costs, can be deducted from the sale price when calculating capital gains on property sales, lowering the taxable capital gains.
Example:
Mr. Gupta sold his property for ₹60 lakhs. However, he incurred expenses such as brokerage fees, legal charges, and advertising costs amounting to ₹2 lakhs, which can be deducted from the sale price. As a result, the sale price is ₹58 lakhs.
- Holding Period
Holding a property for more than two years can qualify you for long-term capital gains tax rates, which are typically lower than short-term rates. - Availing Indexation Benefit
When you sell a residential property after holding it for at least two years, you can take advantage of the indexation benefit. Indexation adjusts the purchase cost of the property to account for inflation, which effectively lowers the amount of capital gains and subsequently the tax on it. - Buying a New Property (Exemption under Sec 54)
One popular method of saving tax on the sale of a residential property is by reinvesting the capital gains in another residential property. Under Section 54 of the Income Tax Act, you can claim an exemption if you fulfil certain conditions—
Firstly, you need to purchase a new property either one year before or two years after selling your existing property. Alternatively, you can construct a new property within three years of selling your previous one.
The entire sale proceeds must be reinvested to avail full exemption. If only the capital gain is reinvested, then the exemption is granted proportionally.
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