If you are planning to sell your property, you will have to pay capital gain tax on the profit earned after considering the inflation and indexation benefit. However, there are some provisions available to save on the capital gain tax on sale of property.
Capital gains can be classified as short term or long-term capital gains. If you sell any land or property within 36 months of acquiring it, it’s considered to be a short-term capital gain. If you sell it after 36 months, it will be classified as long-term capital gains
Long-term capital gains on sale of real estate are taxed at 20%, plus a cess of 3%
How to save on capital gains tax on property sale
Long-term capital gains are exempted from taxation (under Section 54 of the IT Act, 1961) for individuals and Hindu Undivided Families on the sale of a house property if:
-Capital gains are used to purchase or construct another house;
-New house is purchased one year before or two years after the sale of the old house;
-The new house is constructed within 3 years after the sale of the old house;
-Only one additional house property is purchased / constructed;
-You don’t sell the new house for 3 years after taking possession of it.
-If the cost of the new property is less than the sale amount, the exemption then only applies proportionately. The remaining money can be re-invested under Section 54EC in under 6 months.
Capital gains account scheme:
If you have not been able to invest your capital gains until the date of filing of income tax return (usually 31st July) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.
However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains.
If you have sold property and wish to save on tax, you can also invest in specified financial assets, which will save your hard earned capital gains from taxation under Section 54EC of the I-T Act, 1961. To do this, you must invest in notified bonds within 6 months of its transfer.