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Ajay is planning to sell his old flat in Punjab and wants to buy a new one in Mumbai. He purchased this flat in March 2005. Ajay is confused regarding the Capital Gains Tax on sale of property, because his friend was telling him that the entire profit on sale will be taxable as per his Income Tax slab of 30%. Let us analyse the tax implications on such property transactions.

Capital Gain Tax on sale of property

Capital Gains Tax on sale of property – Short Term and Long Term

Your tax liability on the sale of property will be decided based on the number of years of holding. If you are selling the property after 3 years of holding, the gains will be treated as long-term capital gain. But if you are selling it within 3 years of holding it, the gains will be treated as short-term capital gain.

The short-term capital gain will be added to your income in the year of sale and will be taxed as per your tax slab. If you are selling a property after 2 years of holding and if you receive a profit of 5 lakhs in the transaction, this amount of 5 lakhs will be added to your other income of that year and will be taxed as per your tax slab. If you are in the 30% slab, you will end up paying 30% of 5 Lakhs as short-term capital gains tax on sale of property.

But long-term capital gains will be taxed at a lower rate of 20%. Here, you will get the benefit of indexation also. Indexation will help you in reducing your tax liability.

Also Read: Tax on Mutual Funds – How to Calculate?

How Indexation will reduce Capital Gains Tax on sale of property?

Indexation is a process which allows you to recalculate your cost of purchase according to the cost of inflation index published by RBI every year. Indexation will help you to increase the purchase cost to offset for the inflation.

Suppose, you have purchased a flat in March 2001 for Rs. 5 Lakhs and sold it in Feb. 2013 for Rs. 25 Lakhs. You got a profit of Rs. 20 Lakhs. How to calculate the Capital Gains Tax on sale of property?

The cost of inflation index for 2000-01 is 406 and that for 2012-13 is 852.

The indexed cost of the flat at the time of sale will be 5,00,000 x 852/406 = 10,49,261.

Long-term Capital Gains = Sale price – Indexed cost of purchase

Long-term Capital Gains in this case will be 25,00,000 – 10,49,261 = 14,50,739.

So, your Long-term Capital Gains Tax on sale of property will be 20% of this gain of 14,50,739. This works out to 2,90,148.

How to save Long-term Capital Gains Tax on sale of property?

As per Section 54 of the Income Tax Act, if you invest the Long-term Capital Gains in a new residential property, such gains are exempted from paying tax. But you have to make such investment in a new property either one year before or within 2 years from the sale of your property. You can also construct a new house within 3 years from the date of sale. But you should not own more than one house, in addition to the house you are buying.

But, if you have not finalised a new property and invested the gains before the due date of filing your IT returns, you have to deposit such gains in a special account called Capital Gain Account Scheme. This is to show your intention to buy a new property to avoid Capital Gains Tax. You can withdraw the amount from this account as and when you finalise the property.

In case the amount deposited is not used for the purchase or construction of a new house within the period specified, the unused amount will be treated as income of the previous year, in which the period of three years from the date of the transfer of the original house expires.

You have to hold the new property for at least 3 years. If you are selling it before 3 years, the Short-term Capital Gains on that sale and the amount of capital gains exempted earlier also will be added to the income in the year of sale of the new property and taxed as per your tax slab of that year.

Can I save Long-term Capital Gains Tax on sale of property without buying another property?

Yes. In this case, you have to invest the Long-term Capital Gains in specific financial instruments. Such bonds are issued by National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). Such bonds are offering 6% returns now. The investment in such bonds for tax benefit is limited to Rs. 50 Lakhs per year under Section 54EC of the IT Act. You can withdraw the amount after 3 years.

Capital Gain Tax on sale of Property – By Yahoo

Can Ajay avoid Capital Gains Tax on sale of property?

Ajay is much relieved now because his gain will be long-term in nature. Long-term “Capital Gains Tax on sale of property” can be avoided by investing the gains in a new property at Mumbai. But he should not sell his new flat in Mumbai for the next 3 years.

8 Comments

  • Pratap Manohar Posted July 6, 2013 11:31 pm

    Very informative. But what do you do to avoid capital gains tax after holding the property for more than the 5 yr period.

    • Melvin Joseph Posted July 10, 2013 10:56 pm

      If you want to avoid the long term capital gain, you can either invest the gains in another property or invest in specified bonds for 3 years.

  • Daniel Posted October 10, 2013 6:00 pm

    I brought my 2 bed apartment in 2005 for 12.5 lakhs. I am selling it now for 1 crore. I am a NRI and since we plan to migrate to Australia by mid 2014, we want to sell our apartment and use it as a back up plan. How much tax do I need to pay and how can I mimimize the tax amount I have to pay? Also, how do I convert my Indian rupees to Aussie dollars without having to much of a loss?
    Please advice!
    Thanks, Daniel.

    • Melvin Joseph Posted October 31, 2013 6:14 pm

      You have to pay 20% tax on the capital gain after applying the indexation factor. The other option to avoid the tax will be to invest the capital gain in another property.

  • kannan Posted November 28, 2013 3:26 pm

    i bought my flat in 1993 for rs.300000 and planning to sell it for 65 lacs. what mount can i save without paying capital gain after buying a flat for 45 lacs plus all other expenses such registration stamp duty repairs and painintg of the new flat. can i use some part of the capital gain towards investment such as FD to meet my day-today expenses. wud appreciate ur reply.

    • Melvin Joseph Posted December 6, 2013 11:33 am

      You can save tax by investing the capital gain in a new flat. Any amount in excess of the capital gain can be invested in FD etc. T investment will not get tax exemption.

  • B K Ramachandra Posted January 22, 2016 9:21 am

    I was alloted a CGHS flat by DDA (Delhi Development Authority) in the AUG 2015.This flat was booke by me in the year 2003.Due to problems in the society it took 12 years to get the allotment from DDA.The pocession was given by Society in Sept 2015.As I had shifted to BLR after my retirement from Delhi,I wanted to buy a house at BLR.I made an agreement with a prospective buyer for selling the property.Kindly give suggesstions to avoid tax liability on the sale of asset.If tax has to be paid te

    • Melvin Joseph Posted February 13, 2016 11:58 am

      You should consult a local chartered accountant with the documents to verify the tax liability.

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