You might be looking at selling your flat for reasons like purchasing a new real estate property (in all probability) or to move it into other asset classes. Tax planning is very crucial to avoid burning a hole in the pocket to pay the taxman.
While thinking about this, you need to consider few points around taxation. This article will give you some insights into the below points.
- How is the tax calculated for sale of flats?
- What is the tax impact of selling a property bought for saving tax on capital gains?
- How can tax outflow be saved on the capital gains?
- Will there be any impact on the tax exemptions claimed during earlier financial years?
I am sure many of you would have heard about the concept of Short Term Capital Gains (STCG) Tax and Long Term Capital Gains (LTCG) tax. For those who are not aware of it, a short introduction.
If you have held the flat for less than 2 years then the same will be classified as Short Term asset and any gain made by sale of such property will be taxed at STCG tax rate without any indexation benefit. At present STCG rate would be the same rate as your tax slab i.e., if you are falling in the 30% tax slab then the capital gains would be taxed at 30%.
If you have held the flat for more than 2 years then the asset will be classified as Long Term Asset and gains from the sale will be taxed at LTCG rate after applying indexation at 20%.
Few more points to be considered which will help you in reducing the capital gains are:
- Any cost incurred towards selling i.e., brokerage, advertising, registration of stamp duty paid by the seller can also be deducted
- Indexation is applicable not only for the cost of purchase, can be applied for cost of improvement of property as well
First, let’s understand the concept of indexation. We all know that the value of money declines on a year on year due to inflation. Government is not oblivious to this fact and to account for the inflation factor, it releases an indexation table every year so that the amount paid for purchasing the property is adjusted with rising inflation.
Cost Inflation Index Table
|Financial Year||Cost Inflation Index|
Let us understand this with an example: If an individual has purchased home in financial year 2004-05 by paying 5,00,000 rupees, indexed value of that house in the Financial Year 2021-22 would be:
5,00,000 / 113 * 317 = 14,02,654
If he/she decides to sell this property in FY 2021-22 for 20 lakhs, then the capital gains from such property will be:
Sale value – Indexed Value
20,00,000 – 14,02,654 = 5,97,345
LTCG tax in the above scenario will be 20% of 5,97,345 i.e., 1,19,469. This is the amount which an individual will have to pay to the Income tax authorities.
How can tax outflow be saved on the capital gains?
Before we understand how we can save tax on capital gains earned by selling a property, lets understand what is the eligibility criteria.
- STCG – Not eligible for tax exemption apart from the basic tax exemption which is available for all tax payers
- LTCG – Eligible for tax exemption
There are primarily 2 ways in which one can save tax on capital gains.
1. 54 EC Bonds – Investment in Capital Gains Bonds. Eligible bonds list:
- National Highways Authority of India (NHAI)
- Rural Electrification Corporation (REC)
- Power Finance Corporation Limited (PFC) bonds
- Indian Railway Finance Corporation (IRFC) Limited bonds
After calculating the capital gains (after accounting for indexation), one can buy capital gains bonds to the tune of the capital gains amount (As per the earlier example Rs. 5,97,345). Some of the features of these bonds are:
- These bonds will have a lock-in period of 5 years
- Investment should be done within 6 months from date of transfer
- Maximum amount that is eligible for exemption is 50 lakhs
2. Purchase or construction of another property – Sec 54
If an individual invests in either purchasing or construction of another property, even then the capital gains made from real estate will not be taxed. One major factor which needs to be considered is the time frame of investment. If the investment done does not fit into the prescribed timeline, then one can lose out on the tax benefit and will be liable to pay tax on the capital gains made.
- Purchase a real estate property within 2 years from the date of sale
- Complete the construction within 3 years from the date of sale
- Any property purchased 1 year prior to the date of sale
In some instances, you might not be able to find the house which fits your requirement or unable to start the construction of new house, the capital gains made from sale of old house property needs to be deposited with Bank under the Capital Gains Account Scheme (CAGS).
Deposit to this account needs to be made on or before the date of Income Tax Returns filing which is usually 31st of July of every year or before the actual date of tax returns filing.
Amount deposited under CAGS can be withdrawn anytime for purchasing the property or construction of new property. However, if the earlier mentioned timeline of 2 years and 3 years is not honored then the capital gains saved in CAGS will become taxable.
What is the tax impact of selling a property bought for saving tax on capital gains?
If you are selling the property within 3 years from the date of purchase or construction using the capital gains from sale of property, be prepared to shell out more tax on the sale of new property as the capital gains from the old property needs to be reduced from the cost of acquisition of the new property for calculating the LTCG for new property.
Confusing, isn’t it? Let us try to understand this with an example.
|Capital gains from sale of old property – (A)||10,00,000|
|Purchase value of new property – (B)||40,00,000|
|Sale value of new property – (C)||50,00,000|
|For Capital gains calculation: Purchase value of new property (B-A)||40,00,000 – 10,00,000 = 30,00,000|
Tax exemptions claimed earlier Sec 80C and Sec 24
Another important aspect which most of us ignore is the past tax benefits claimed under Sec 80 C for Principal repayment of home loan and Sec 24 for Interest paid on home loan.
If the property is being sold before completing 5 years from the year of possession, then the exemptions earlier claimed under Sec 80C will be included as income for the financial year and will be taxed as per the tax slab of the individual.
However, there is no provision to reverse the benefits claimed under Sec 24 for interest payment. Its advisable to sell the flat after 5 years, in all cases where the tax benefits have been received via Sec 80C.
Hope this article helped you in understanding the capital gains arising from sale of house and you will be able to do efficient tax planning.
If you need any further information, do not hesitate to contact us.