Capital Gains Explained!

Property has gained high importance in any investor’s portfolio. Good appreciation values have seen a large number of buying and selling transactions. While the prospect is attractive, one must also remember that there is an aspect known as Capital Gains Tax which is a liability that must be handled properly. Any profit earned on the sale of a property is taxed as Capital Gains. The amount of tax depends on the holding period of the property. Under the head of Long Term Capital Gains, the liability is based on the indexed cost of acquisition and improvement and is applicable for properties that have been purchase at least 3 years ago. In the case of ready to- move-in properties (residential/ commercial/land etc.), the date of acquisition will be date of the sale deed registration. Normally, in the case of the sale of properties under construction, a tripartite agreement is entered into between the seller (who had originally booked the flat), the purchaser and the builder. Under this agreement, the seller assigns his rights to the under-construction flat to the purchaser with the consent of the builder, while the purchaser agrees to pay the balance of the original purchase price to the builder. Once the possession is given, the date of the sale deed/ registration of the property will be treated as the date of acquisition. If you intend to sell your property in the near future, it is better to do it before the possession/deed registration else you will have to wait for another 3 years to get the benefit of Long Term Capital Gains.

If you would like to save on Capital Gains tax on sale of property then you have a few options,

  1. Invest in a residential property

The seller of the property can claim for tax exemption if he buys only another residential property in India only. However, the amount of investment and exemption depends on the type of capital asset sold. The seller has two options, he can either buy another house within two years of the sale of his property, or he can build a house in three years. He can also buy a house one year prior to selling his property, and still can avail the benefit under Section 54 of the IT Act. If the new house is sold within three years, the deduction claimed will become taxable as Long Term Capital Gains.

  1. Capital Gains Accounts Scheme

If you cannot invest the amount in another property before the due date of filing your tax returns, you can deposit the amount into a bank account under the Capital Gains Accounts Scheme. This amount will have to be utilized for the purchase or construction of the new asset within a prescribed time period. An amount that is not utilized will be taxable as an income of the previous year in which the period of three years from the date of the transfer of the original asset expires.

  1. Invest in a Capital Gains Bond

Irrespective of the type of property, you can invest your profit (Capital Gains) in a Capital Gains Bond such as NHAI or REC up to Rs.50 lakh in a year. However, there is a lock-in period of 3 years for such an investment. If you transfer or take a loan against these bonds within three years, the Capital Gains will become taxable.

The next time you are looking at lucrative property deals ensure you have included Capital Gain tax liability in your calculations before going through with the deal.

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