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Understanding how to save tax on sale of property in India

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Selling a property can be lucrative, but knowing how to save tax on the sale of property in India is essential.  

Capital gains

The profit from selling a property is known as capital gain, which falls under two categories:

  • Short-term capital gains (STCG): If you've owned the property for less than 24 months, it falls under STCG. Tax is calculated based on your regular income tax bracket or tax slab.
  • Long-term capital gains (LTCG): Properties held for more than 24 months qualify as LTCG. In India, LTCG gets taxed at a flat rate of around 20%, with various rebates available to taxpayers.

How to save tax on the sale of property in India? 

First, you need to understand the following sections:

  • Section 54: Exempts capital gains tax for residential property sellers reinvesting in another residential property.
  • Section 54EC: Grants tax exemptions when capital gains are invested in specified bonds.
  • Section 54F: Section 54F offers capital gains tax exemptions to those who sell land or plots and buy a new residential property, subject to specific conditions.

How to save capital gain tax on the sale of residential property?

For LTCG on the sale of a residential house, you can claim exemption by investing the taxable gains in another ready-to-move-in house within two years after the sale. If you buy a new house before selling your old property but up to one year before the sale, you can still avail of the exemption. 

This exemption is available only for one residential house. However, there's a once-in-a-lifetime opportunity to invest the LTCG from one house into two houses, provided the LTCG amount doesn't exceed INR 2 crore. You can also construct a house within three years to claim this exemption.

Purchase of specified bonds

An alternative is investing LTCG in designated institution bonds (e.g., NHAI, REC, RFC) within six months from the sale. These bonds last five years and provide 5.25% annual interest, which is taxable. Upon maturity, the proceeds are tax-free, with a yearly limit of INR 50 lakhs per transaction.

Utilise capital gain account scheme (CGAS)

You can park your gains in a public sector bank under CGAS. You must use this amount to purchase a house or fulfil the conditions for tax exemption. 

Set off losses and carry forward.

To reduce your tax liability, you can offset gains from property sales with losses from other assets, such as gold or stocks. 

How to save tax on the sale of ancestral property in India? 

Consider capital gains exemptions under Sections 54, 54F, and 54EC by reinvesting in residential properties or bonds. You can consult a tax professional and explore options like gifting or partitioning the property to reduce tax liability.

The final word

Selling a property in India can yield substantial profits. By leveraging tax exemption provisions like Section 54, Section 54EC, and Section 54F, you can significantly reduce your tax liability and make the most of your property sale.

 

Frequently Asked Questions

1. What is Section 54EC?

Ans: Section 54EC allows tax exemptions on capital gains when investing in specified bonds.

2. How to save tax on inherited property sales?

Ans: Utilise Section 54B/54D/54G exemptions for agricultural lands or consider long-term holding benefits.


 

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