Realestate is generally a great term investment option if you have patience andfinancial resources to acquire and sustain it. It helps in generatingcontinuous passive income and is a good strategy to begin building wealth forfuture financial stability and security. There will be taxes and regularmaintenance charges to cover so gaining technical and practical know-how aboutthis investment option is a good place to start. Livemint.com also highlighteda study by the Institute for New Economic Thinking which states that“residential real estate, not equity, has been the best long-run investmentover the course of modern history”. Their study finds that while returns onhousing and equities have been similar in the long-run, housing has been muchless volatile. Hence, risk-adjusted returns from housing has been better overthe long run and that is why buyers prefer it while financial planning.
Notmany are aware of the capital gains tax. It often comes up as an unexpected taxfor many people. In some situations, it can turn out to be a huge tax and caneat up the profits you earn while selling a property. The capital gains tax youpay depends on whether it’s short term or long term. Short term capital gainsare added to your taxable income, and you have to pay income tax according tothe different tax slabs. Long term capital gains attract 20% tax on the gains.
Onthe other hand, capital loss is the loss incurred when any capital assetdepreciates in value and the loss is realized when the asset is sold for aprice lower than the original purchase price. In essence it’s the differencebetween the purchase price and the sale price where the latter is lower thanthe former. So if a house bought for $350,000 is sold 5 years later for$300,000, the capital loss comes out to be $50,000.
Aproperty tax assessment is undertaken annually to determine the market value ofthe property. It is carried out by determining the area it is in, occupancystatus (self-occupied or rented out), type of property (residential, commercialor land), amenities provided (parking, rainwater harvesting etc.), year ofconstruction, type of construction (multi-storied/ single floor, pucca/kutchastructure, etc.), floor space index and carpeted square area of the property.
Thereare several smart ways that you can save on capital gains tax in India. Here,in today’s post, we show you all that you need to know about this tax and thebest ways to reduce it.
What is Capital Gains Tax in RealEstate?
Simplyput, capital gains is the profit you make when you sell a capital asset – aplot of land, a residential house, a commercial building or any other capitalasset for a higher price than the price you paid for acquiring it. The rateslevied are 20% for Long Term Capital Gains (LTCG) and Short Term Capital Gains(STCG) depending on an individual’s tax bracket. Capital gains can be dividedinto two major classifications:
|Long Term Capital Gains Tax Exemptions on Sale of Land/House|
|Section 54||Section 54EC||Section 54F|
|Who can claim the exemption?||Individual/HUF||Any person||Individual/HUF|
|Asset sold/transferred||Residential Property||Land Or Building or Both||Land/Plot (other than Residential House)|
|Holding period of Original Asset||More than 2 Years||More than 2 Years||More than 2 Years|
|New Asset to be acquired||Residential House||Notified bonds||Residential House|
|Time limit for new investment||Purchase: 1 year backward or 2 years forward||Within 6 months||Purchase: 1 year backward or 2 years forward|
|Construction: 3 years forward||Construction: 3 years forward|
|Exemption Amount||Investment in the new asset or capital gain, whichever is lower||(Long Term Capital Gain) Amount invested in new asset or bonds or capital gain, whichever is lower (maximum upto Rs.50 lacs)||(Long Term Capital Gain x Amount invested in new house) divided by sale proceeds of original asset i.e Net Consideration or Capital gain , whichever is lower|
How to Calculate Capital GainsTaxes?
Forshort term capital gains, here’s the formula to use:
|Calculation of Short Term Capital Gains|
|Total Sale Price (Full Value of Consideration)||xxxx|
|Less:||Expenses related to Sale/Transfer||xxxx|
|Less:||Cost of Improvement||xxxx|
|NET SHORT TERM CAPITAL GAINS||xxxx|
Shortterm capital gains = Total sale price of the property – (cost of initialpurchase + expenses incurred during the sale + cost of renovations made (ifany).
Thisamount should be added to your taxable income.
Theformula for long term capital assets is similar; however, the one difference isthat the “Indexed Cost of Improvement/Indexed Cost of Acquisition” from thesale price.
|Calculation of Long Term Capital Gains|
|Total Sale Price (Full Value of Consideration)||xxxx|
|Less:||Indexed Cost of Acquisition||xxxx|
|Less:||Indexed Cost of Improvement||xxxx|
|Gross Long Term Capital Gains||xxxx|
|Less:||Exemptions U/S 54 Series||xxxx|
|NET LONG TERM CAPITAL GAINS||xxxx|
Toarrive at the indexation, you should apply the cost inflation index (CII).Indexation helps you adjust the purchase price to account for the rate ofinflation for the years you have held the property. This accordingly increasesyour cost base and lowers capital gains on par with the inflation rates.
Who should pay Capital Gains Taxfor Real Estate Selling?
Ifyou sell a house, an apartment, a plot of land or any other property for aprice higher than what you initially purchased it for, then you are liable topay capital gains tax.
How to file Capital Gains Tax inIndia?
Onceyou have calculated your capital gains and the type, the next step is toinclude it in your income tax returns. You have to disclose details like costof purchase, type of asset, sales consideration, transfer expenses, etc. inyour income tax details.
Now,that you’ve understood the basics of what is capital gains tax and how tocalculate and file it, let’s take a look at some ways to save capital gainstaxes in India while selling a property.
Ways to Reduce Capital Gains Tax
Generally,the capital gains tax you have to pay when selling a property runs in lakhs.However, you can substantially reduce it by using one of the following methods:
1. Exemptions under Section 54F,when you buy or construct a Residential Property
Veryoften, when people move to a new house, they sell their old house to pay forthe new house. In such cases, if you use the sale proceeds obtained fromselling your old property to pay for the new one, you are exempted from capitalgains tax under Section 54F, if you meet the following conditions:
Currently,Section 54F applies to only one residential property. It allows for the sale ofnon-residential property to purchase a residential property. If you use theentire capital gains for the purchase of the new property, then you don’t haveto pay any capital gains tax.
Who is it for? Exemptions under Section 54Fis ideal for people who sell a property to pay for the purchase of a newresidential property.
2. Purchase Capital Gains Bondsunder Section 54EC
Ifyou are selling a property, but have no interest in purchasing a residentialproperty using the proceeds, then you can make use of capital gains bonds.
Let’stake a look at the features of capital gains bonds:
Who is it for? Capital gains bonds workwell for people who aren’t interested in purchasing a new residential property.
3. Investing in Capital GainsAccounts Scheme
Purchasinga new residential property may take time. You have to find a preferredhome/apartment that you like to buy, negotiate with the seller and completepaperwork – all of which can be time-consuming.
Investingin capital gains accounts gives you temporary relief. Consider this as parkingyour capital gains tax safely for the time being, while you scout for a newproperty. You can invest the capital gains you obtained by selling a propertyin a public sector bank or other banks approved by the capital gains accountscheme of 1988.
If you manageto find great companies and hold their stock for the long term, you will paythe lowest rate of capital gains tax. Of course, this is easier said than done.A company’s fortunes can change over the years, and there are many reasons youmight want or need to sell earlier than you originally anticipated.
When youinvest your money through a retirement plan, such as a 401(k), 403(b), or IRA,it will grow without being subject to immediate taxes. You can also buy andsell investments within your retirement account without triggering capitalgains tax.
In the caseof traditional retirement accounts, your gains will be taxed as ordinary incomewhen you withdraw money, but by then you may be in a lower tax bracket thanwhen you were working. With Roth IRA accounts, however, the money you withdrawwill be tax-free, as long as you follow the relevant rules.
Forinvestments outside of these accounts, it might behoove investors who are nearretirement to wait until they actually stop working to sell. If theirretirement income is low enough, their capital gains tax bill might be reducedor they may be able to avoid paying any capital gains tax. But if they’realready in one of the “no-pay” brackets, there’s a key factor to keepin mind: If the capital gain is large enough, it could increase their taxableincome to a level where they’d incur a tax bill on their gains.
You can use capital losses to offset yourcapital gains as well as a portion of your regular income. Any amount that’sleft over after that can be carried over to future years.
If youexperience an investment loss, you can take advantage of it by decreasing thetax on your gains on other investments. Say you own two stocks, one of which isworth 10% more than you paid for it, while the other is worth 5% less. If yousold both stocks, the loss on the one would reduce the capital gains tax you’dowe on the other. Obviously, in an ideal situation, all of your investmentswould appreciate, but losses do happen, and this is one way to get some benefitfrom them.
If you have acapital loss that’s greater than your capital gain, you can use up to $3,000 ofit to offset ordinary income for the year. After that, you can carry over theloss to future tax years until it is exhausted.
When you’veacquired shares in the same company or mutual fund at different times and atdifferent prices, you’ll need to determine your cost basis for the shares yousell. Although investors typically use the first in, first out (FIFO) method tocalculate cost basis, there are four other methods available: last in, firstout (LIFO), dollar value LIFO, average cost (only for mutual fund shares), andspecific share identification.
Inyour income tax returns, you can claim tax exemptions for the money you haveparked in capital gains accounts in approved banks. You don’t have to pay anytax for it. However, the amount has to remain with the bank for three years, failingthe deposit will be treated as capital gains, and you have to pay tax for it inthe next financial cycle.
Who is it for? Investing in capital gainsaccount scheme is ideal for people who want to purchase a residential propertyby using the proceeds but want a place to park it temporarily, till theycomplete the details of the purchase.
Example of Capital Gains Tax whileSelling Property in India
SayMr Amit purchased a house in 2001-02 for INR 10,00,000. He happily lived in thehouse with his family and children. His children have grown up and arewell-settled in the USA. Hence, In 2018, he plans to sell his current propertyfor Rs. 40,00,000 and use its proceeds to buy a new home at a purchase price ofRs. 40,00,000.
Thelong term capital gain for Amit in this situation is calculated below.:
|Selling Year of the house||2018-2019|
|Original Cost of Acquisition||Rs. 10,00,000|
|CII of 2001-2002||100|
|CII of 2018-2019||280|
Thecapital gains tax he will save on the deal of selling his property in India iscalculated as below:
|Sales Consideration||Rs. 40,00,000|
|Less-||Indexed Cost of Acquisition||Rs. 28,00,000|
|Long Term Capital Gain||Rs. 12,00,000|
|Less-||Exemption from Tax:|
|a) Section 54: Purchase of new house||Rs. 40,00,000|
|b) Section 54EC: Investment in REC/NHAI Bonds||————-|
|NET TAX PAYABLE||Rs. 0|
Hence, the purchase value of thenew house is more than the long term capital gain, the tax payable will be nilin this case. Capital gains tax is one of the unavoidable side-effects ofselling property in India. However, you can avoid paying large sums as capitalgains tax by using any one of the above methods listed here. Understand thedifferent exemptions available to you and pick the right one that suits yourspecific situation.
Ashiana, Ashiana Housing build homes. Homes surrounded by vast green spaces and fresh breeze. Homes cocooned in secured gated complexes. Homes where futures are forged and there are opportunities to grow. And Homes in environments brimming with healthy activity, trust and respect. At heart, we build communities with care.
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