How to Avoid Capital Gains Tax on Property Sales in India

Investment in a real estate property is one of the most sought-after investments in India. While most purchase a property to get a permanent roof for their family, others invest in properties to earn valuable returns from it. A real estate property is a capital asset and profit made from the sale is termed as capital gains, and it is a taxable income.

In simple words, any profit that you may earn from the sale of a capital asset like a real estate property is termed as a capital gain. For taxation purposes, the profit made from the sale is categorised as ‘income,’ and hence you are liable to pay tax in the year in which the sale transaction is completed. The tax paid is called ‘capital gains tax,’ and it can be either short-term or long-term.One of the vital things to know about capital gains tax is that it does not apply to the inherited property, or property received as a gift as there is no purchase or selling involved. The capital gains tax is applied only on the transfer of ownership. However, if you decide to sell the inherited property and earn a profit, capital gains tax will be applied.

In India, there are two types of capital gains tax – short-term capital gain tax and long-term capital-gain tax

• Short-term capital gain tax Any asset that you hold for less than three years is known as a short-term asset. In case of immovable assets like real estate property, the holding duration is two years. The profit earned from the sale of such assets is treated as short-term capital gain, and it is taxed accordingly.
• Long-term capital gain tax Any capital asset that you hold for more than three years is categorised as a long-term asset, and the profits earned from the sale of such assets is treated as long-term capital gain and taxed accordingly.

Yes, you can avoid paying capital gains tax by taking advantage of the tax exemptions under different sections of the Indian Income Tax Act, 1969.

Section 54

When you sell any property like a house or a piece of land and earn profits from it, it attracts capital gains tax. But you can get an exemption from the tax under Section 54 if you reinvest the capital gains to purchase or construct another house.Until the Budget 2019, the exclusion was limited to only one property, but, today, you can get exemption on the purchase of a maximum of two homes. However, to get the exemption, the capital gains must not exceed Rs. 2 crores. Additionally, the exemption can be claimed only once.

Section 54EC

If you want to avoid paying the LTCG tax from the sale of the property and do not wish to reinvest in a real estate property, you use Section 54EC. The section allows exemption of LTCG on sale of the property if the capital gains are invested in specific bonds issued by the government organisations like the National Highway Authority of India and Rural Electrification Corporation.The exemption is applicable on sale of both commercial and residential property. The maximum that you can invest in these bonds is Rs. 50 lakhs and the investment comes with a lock-in period of five years.

You can avoid paying the capital gains tax on the property if you reinvest the amount in a new property. But, the exemption will sustain if you hold the new property for at least two years. If you sell the property before 24 months, the exclusion will be reversed, and you would be liable to pay the capital gains tax that was exempted earlier.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.