How to save tax on property sale?
Are you planing to sell that property you own? If yes, do read through this article for tips on savings tax.
What is Capital Gain
Profits or gains arising from transfer of a capital asset are called “Capital Gains” .
Taxability of Capital Gains
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”.
Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”
Short Term Capital Asset:
If the property is sold before 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.
Long-Term Capital Asset:
If the property is held for more than 36 months immediately preceding the date of its transfer will be treated as long-term capital asset.
>> For the purpose of this article we are considering property as the only capital asset.
In brief, If you sell the property before 3 years the gains are taxable as short term capital gains.
If the property is sold after 3 years, the gains are taxable as long term capital gains.
>>Long-term capital gains are charged to tax @ 20% (plus surcharge and cess as applicable)
>> Short Term Capital Gain be taxed will as per the Income tax slab of the individual.
You cannot avoid tax on short term capital gains. you can , however, claim deductions to lower the tax liability on long-term gains.
Buy a House:
Investing in a house is a popular investment option. LTCG from selling a house get tax exemption if they are invested in buying or building a new house.
The new house has to be bought one year before the transfer of the first house or within two years after the sale.
The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.
If you plan to use the gain to build a house, it has to be done within three years of the sale of the property.
When you buy a plot to build a house, the cost of land is included in the construction cost. Buying an under construction property also entitles you for tax deduction.
You can buy an under-construction house to save capital gains tax, provided construction is completed within three years of the transfer of the first property.
If the new property is sold within three years of purchase or construction, the deduction will be reversed and taxed as short-term capital gain.
In cases where capital gains have been made by selling land (assets other than a house), the investments required for deductions are different. Full deduction is allowed (under Section 54F) in cases where the entire sale proceeds are invested in a new house or used to build a new house. If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
When are Gains Tax Exempt?
When you sell farm land, you do not have to pay any capital gains tax on the profit earned.
The exemption is not valid if the land is within the limits of a civic body (municipality, municipal corporation, town committee or a cantonment board) with a population of 10,000 or more at the beginning of the previous year.
It also does not apply if the land is within 8 km of such civic limits.
If you have made capital gains from sale of land used for agricultural purposes (by you or your parents) for at least two years before the transfer date, the money can be invested in any land for agriculture.
The invested amount then becomes eligible for deduction.
The exemption is withdrawn if you buy another land within two years of the deduction.
Hope these tips help you plan better while selling/buying that fancy property.