SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.
Taxation on sale of House property

Tax Implications on sale of House property

My friend Deepak sold his flat last month with a bumber profit of 20 lakhs. He purchased this flat for 30 lakhs in December 2009 and now sold at 50 Lakhs in Dec.2011. Cool profit of 20 Lakhs in just 24 months!

He had the biggest shock in his life, when I told him that his profit of 20 lakhs will be taxed at his marginal tax rate of 30% and cess. He has to pay 30.09 % tax on the profit of 20 Lakhs. 6.18 Lakhs as tax! His profit reduced to 13.82 Lakhs!

Yes, such transactions attract tax. Let us see the tax implications on house property.

Short Term Capital Gains

The profit generated by selling house property held for not more than 36 months is Short Term Capital Gain (STCG).

Short Term Capital Gain is added to other income of the tax payer and taxed as per the tax slab of the individual. My friend Deepak is in the 30% slab and so his profit will be taxed at 30%.

Long Term Capital Gains

The profit generated by selling house property held for more than 36 months is Long Term Capital Gain (LTCG). These Gains will be taxed at 20.6% with indexation benefits.

For calculating Long term capital gains, you have to reduce the indexed cost of the house property from the sales consideration. For example, if you purchase a flat in 2005-06 for 20 Lakhs and sell it in 2010-11 for 50 Lakhs, the long term capital gain tax will be calculated as follows.

Long Term Capital Gain = Sales Consideration – Indexed cost of acquisition

Cost of inflation index for 2005-06 is 497 and that for 2010-11 is 711.

So, the indexed cost of acquisition = 20, 00, 000 x 711/497 = 28, 61,167

Long Term Capital Gain = 50, 00,000 – 28, 61,167 =21, 38,833

Long Term Capital Gain Tax = 20.6% on 21, 38,833 = 4, 40,600/-.From the profit of 30 Lakhs, he has to pay 4, 40,600/- as long term capital gain tax.

How to save Long term Capital Gain Tax?

There are ways to avoid paying long term capital gains tax. Let us discuss the options.

1. As per Section 54 of the IT Act, you can save the Long term capital gain tax, from the sale of a residential property, if the gain is used to purchase another residential property, one year before or two years after the date on which the transfer took place. Or you can utilize the gains to construct a new house within 3 years of the sale. If the capital gain is not fully invested as above, you have to pay capital gain tax for the balance amount at 20.6%, as calculated above.

The amount of capital gain not utilized for purchase or construction of new house within the same accounting year, but which is earmarked for such purchase of construction, must be deposited in a specified bank account opened under ‘Capital Gains Account Scheme’, and payments in subsequent years must be made from such account. This should be deposited on or before the due date of filing IT returns.

2. You can avoid the Capital gain tax under Sec. 54 EC, by investing the capital gain in the specified bonds. This will have a lock in period of 3 years. National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) are issuing such bonds. You have to invest the capital gains in such bonds within 6 months of sales.

Deepak is regretting now for selling the flat in 2 years. He should have waited for 1 more year to avoid the tax by making it long term and reinvesting in another flat.

10 Comments

  • MANOJ KUMAR JAIN Posted April 13, 2012 10:18 am

    Your example of saving Long Term Gain is read by me.Pls clarify that the Bonds issued by NHAI and REC are available all the times every year or these authorities comes out with these Bonds Time to Time i.e. Are these Bonds open to invest any time for every FY.

    Regards
    Manoj Jain

  • Kevin Dias Posted January 7, 2013 2:41 pm

    Flat was purchased in 2005 January for Rs 6.50 Lacs now I would like to sell the flat and I am getting a potential of Rs 44 lacs. My question is will i be taxed if no why and if yes How much will the percentage be? Is there anyway I can avoid the charges.
    Regards
    Kevin Dias

    • Melvin Joseph Posted January 12, 2013 2:02 pm

      The gain in this transaction will be treated as long term capital gain and will be taxed at 20% with indexation benefits. The cost of inflation index for 2004-05 is 480 and that for 2012-13 is 852. So, if you are selling it before 31st March. 2013, the indexed cost of your flat will be 6,50,000 X 852/480 = 11,53,750.
      If you are selling the flat now for 44 Lakhs, the difference of 32,46,250 (44,00,000 – 11,53,750 = 32,46,250) will be taxed at 20%. So, you have to pay tax of 6,49,250 .
      You can save this tax by investing in another property or by investing the gains in specified bonds of NHAI or REC which offers 6% returns. The amount will be locked in for 3 years.

  • REddy Posted April 17, 2013 12:30 am

    Sir !
    From Last Oct2012 onwards I started investing in a flat (being constructed by a builder ) with my own money -result of longterm gains sold from shares, as i was not able to make a sale of another Flat (which was bought in year 1979).in one ofthe metro .
    The new Flat is not going to be completed before jan 2014 .
    REcently I got good offer for the sale of my old Flat(bought in 1979), and wish to complete the sale transaction in May 2013.
    Kindly let me know, whether the entire capital gain proceeds from the sale of my 1979 Flat is assumed to be invested in new Flat, from the capital gains point of view.
    Please clarify

    • Melvin Joseph Posted April 18, 2013 6:28 pm

      To get exemption from capital gain tax, you have to invest the capital gain from old flat in a new residential property. The investment should be between n-1 and n+ 2 years from the date of sale of the old property. You have to invest only the capital gain amount and not the entire sales proceeds.
      If you are not investing the entire gain like this, you can invest the left out in specified bonds to save tax under section 54EC.

  • macs Posted May 31, 2013 12:05 pm

    One of our relative had purchased a flat in Pune around 16 Years back in Kothrud area at around 6 L. Now they are planning to sell this flat at around 85 Lakhs. We know that this money if invested in another propert will not have any TAX but the question is can they take 2 different properties where the total reaches more than 70 L? Will they have to pay any tax on this. Please suggest.
    Thanks in advance

    • Melvin Joseph Posted June 3, 2013 6:13 pm

      If they are going for 2 adjoining flats, they can do so.

  • sesha prasad Posted August 17, 2013 2:36 pm

    My brother acquired property in two plots ie., (1) on 4.8.2003 for Rs.24000 and (2) on 15.2.2002 for Rs.3.71 lakh.

    He sold these two plots at one time 20.9.2010 for total Rs.41.10 lakh and kept in capital gain a/c with a Nationalised Bank within the prescribed time schedule. He is not able to invest this amount in another house within the time schedule of 3 years (constructing a new house). What is the remedy for him now. If tax is to be payable, what is the amount and what is the paymewnt due date.

    He acquired the property in two plots ie., (1) on 4.8.2003 for Rs.24000 and (2) on 15.2.2002 for Rs.3.71 lakh.

    • Melvin Joseph Posted August 24, 2013 10:41 am

      In tghis case, the tax liability will be long term capital gain tax, which is 20% on the capital gain after the indexation benefits.
      You may ask your brother to consult a local auditor with all papers and seek his help.

  • Usha Posted September 16, 2014 8:40 pm

    Dear Melvin,

    If one sells the property after 3 years (long term gains) and does not want to purchase another property but invest the capital gains part in bonds of NHAI/REC for 3 years, what will be the rate of interest on these bond and will the interest be taxed, if affirmative at what rate.

    Many thanks
    Usha

Add Comment

Your email address will not be published. Required fields are marked *