Know How to Save Capital Gain Tax on Sale of Property

Gains made from sale or transfer of immovable property are known as capital gains, which can be further divided into Short-term Capital Gains (STCG) or Long-term Capital Gains (LTCG) . Here is how it is calculated and the relevant tax applied.

Indexation benefit in case of long-term gains enables you to factor in the effect of inflation on your gains which reduces your tax liability. Income Tax Act Moreover, the long-term gains tax can be partially or completely offset in case you choose to re-invest the gains into the purchase of another residential property under section 54 of the

Section 54, allows you tax exemption if you invest the capital gains in purchasing or constructing another residential property. However, there are certain provisions in this act which must be considered.

1. The new property should be bought within two years of the sale of the property.
2. The new property is bought within one year before the sale of the property.
3. In case, the gains are used for the construction of another existing property; it should be done within three years of the sale of the property.
4. The new property should be held for at least three years. In case the property is sold in less than three years, any capital gains tax exemptions received earlier will be deducted from the cost of acquisition while calculating gains.

The gains should be equal to or lesser than the price of the new residential property. In case the gains are more than the re-invested amount, the exemption will be up to the amount re-invested.

While you can only buy one residential property from the gains to avail exemptions, in case the gains is less than 2 crores, you can use it to buy up to two residential properties. This option of buying two properties can only be exercised once in a lifetime.

While you get 2 years to buy another property from the gains or use it construct an existing residential property, the decision about the gains needs to be taken in the financial year in which the property was sold. In case you are not able to make a decision or buy a residential property, gains made will be considered as long-term gains, and relevant tax will be applied.In case you have decided but have not been able to find an avenue to re-invest, you can deposit the money in a Capital Gains Account Scheme (CGAS) and gain exemption in the relevant financial year. The money in this account can be held for up to 3 years, and if it, or a part of it, still remains unutilised, then relevant tax on the remaining gains are applied in that particular financial year.Re-investing capital gains to buy a new property not only helps to save taxes, but it is also a sound investment. Take your time, determine your capital gains and make a sensible decision because once you have invested in the new property, you will not be able to sell it for three years. So, wait, analyse and select a lucrative location to get the best of both worlds!Ready to make the most of your money? Start your tax planning journey now!

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.