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.