Are you planning to sell your house? If yes, you should be aware of the tax implications of this sale. On the sale of a property, you will be liable to pay a capital gains tax. Let’s understand this in detail.
What is Capital Gains Tax?
When you sell any asset, the profits earned from the sale are termed as capital gains. These gains are earned when you sell an asset like shares, property, etc. at a higher rate as compared to your purchase price. The tax levied on these profits is known as capital gains tax.
Also Read: What Is Capital Gains Tax?
This tax is levied after taking into consideration the inflation and indexation benefit. As per the income tax laws in India, the holding period of the property, i.e., the period for which you have held the property before selling it, determines your capital gains tax liability.
Capital Gains Tax On Sale Of Property- Categories
Capital gains tax can be classified into two categories based on the property’s holding period- short-term capital gains tax and long-term capital gains tax.
If you sell the property within 3 years (36 months) of purchasing it, the gains from the sale will be considered as short-term capital gains and will be added to your total taxable income. Here you will have to pay the short-term capital gains tax as per your income tax slab. On the other hand, if you sell the property after 3 years of acquiring it, the gains from this sale will be considered as long-term capital gains and will be taxed at 20%.
Capital gains tax is liable even if you sell a house or property that you have inherited or was gifted to you. In such cases, the purchase cost of the property is calculated based on the cost incurred by its previous owner, indexed to the year of purchase.
Ways To Save Capital Gains Tax On Sale Of Property
As per Section 54 of the Income Tax Act of 1961, the long-term capital gains on the sale of property are exempted for individuals and Hindu Undivided Families if they satisfy the following terms:
The capital gains from the sale of property are used to buy or construct another house
The new property is bought a year before or two years after the sale of the old property
The construction of the new house is done within 3 years after the sale of the old property
Only one new house/property is constructed or purchased
The new house is not sold for at least 3 years after taking possession
If the new property costs less than the sale amount of the old property, the tax exemption will apply proportionately.
Capital Gains Account Scheme:
If you cannot construct or buy a new property soon after gaining a profit from the sale of the old property, but intend to do so in the near future, Section 54 of the Income Tax Act also allows you to invest the profit in any public sector bank under the Capital Gains Account Scheme (CGAS).
Bonds:
In case you do not wish to purchase another property, under Section 54EC of the Income Tax Act, you can also choose to invest the long-term capital gains in notified bonds within 6 months of the sale of the old property to get a tax exemption.
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