How to Save Tax on Residential Property Sale: Choose The Right Time

Many people are unaware that they must pay tax on profits gained on the sale of a residential property, especially those who do not file income tax returns. In certain situations, choosing the appropriate timing will allow one to avoid paying these taxes.

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A lot of money is needed while buying and selling real estate, but the current market price and the buyer’s preferences also matter. So, choosing a home to buy or finding a qualified buyer to sell both needs a lot of time.  

One must wait not only to find a buyer but also to avoid paying money on any sort of capital gains made while selling a house.

For the reason that any capital gain, if any, is considered short-term capital gain (STCG) and contributed to the income if one sells a property in less than two years of the date of purchase, this is the scenario. On the other hand, if one sells a house after two years from the date of purchase, the gain, if any, is considered a long-term capital gain (LTCG) and is taxed at a fixed rate of 20%, and that too after receiving an indexation benefit.

“A capital gain occurs when a property’s price increases. The profits from the sale of real estate stay as an investment for a brief period and are subject to standard income tax rates of the levy. Short-term capital gains (STCG) are defined by law as gains on assets held for less than 24 months, according to Archit Gupta, founder, and CEO of Clear.

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Tax liability based on the holding period

The profits are considered long-term capital gains if the house is sold after being held for 24 months. By reducing the indexed cost of the house from its net sale price, long-term capital gains are calculated. On the capital gains estimated in this way, one must pay tax at a fixed rate of 20.80%. Despite the tax bracket, this rate is needed. The taxable capital gains will be reduced by the amount by which one’s other income falls short of the general exemption level if one has no other income or if it is less than the taxable limit.

The profits are considered short-term capital gains if the house is sold within 24 months, and there is no method to lower the amount of tax that must be paid on such profits. These short-term capital gains are regarded as regular income and are accordingly counted with other sources of income.

One must pay money if their taxable income, which includes these short-term gains, exceeds Rs 2.50 lakh. For those over 60 but under 80, the maximum exemption is Rs. 3 lakhs. If the total exemption does not exceed Rs. 5 lakhs, no tax is owed by those over 80. After accounting for several deductions like payments for life insurance, medical insurance, PPF, bank interest income, etc., the taxable income is calculated.

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Exemption option – Buy another residential property

If one invests the long-term capital gains to buy a ready-to-move-in home within two years of the date of the house’s sale, they can claim exemption from taxation for long-term capital gains on the sale of a residential home. If the home purchase was before the date of sale but no later than a year after the date of sale, the exemption is still valid for ready-to-move-in homes.

In India, this exemption is only applicable to investments in one residential property, but the income tax laws give one a once-in-a-lifetime opportunity to invest long-term capital gains from one property in two assets to qualify for an exemption on long-term capital gains from one property. If the long-term capital gains from selling the house do not exceed Rs 2 crore, the one-time option may be used.

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In addition, if people build a house in three years, they can ask for an exemption from paying such long-term capital gains. Booking a constructive property is also considered to be a house building. If they intend to purchase a property by booking a property that is still under construction, they have to make sure that they will take possession of the property within the three-year time frame mentioned above.

Before the last date for submitting the income tax return, one must spend the number of capital gains to purchase a home or pay the developer. If they can’t spend all their capital gains, then they must deposit the remaining sum with a bank under a “capital gains scheme.” The funds in a capital gains account must be used for the same purpose within the allotted period; otherwise, the account’s remaining balance would be subject to taxation.

The payment of brokerage fees, stamp duties, registration fees, transfer fees, etc. will be counted toward the cost of the new home for this exemption’s purposes, as a result, be exempt from payment together with the initial cost of the new home’s acquisition or construction. The house property must be transferred within 36 months of the purchase date; otherwise, the previously claimed exemption will be revoked in the year that the new house is transferred.

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Purchasing specific bonds

The next strategy to avoid paying taxes on long-term capital gains is to invest them within six months of the sale date in bonds issued by certain financial institutions, like the National Highway Authority, Rural Electrification Corporation, Railway Finance Corporation, etc.

Highlighted that both cases need investment even if one has not received the entire sale price for the sold residential property. The fact that one is not allowed to invest more than Rs 50 lakh in these bonds in a calendar year or in connection with a single capital gains transaction is another crucial fact to be aware of. The ability of a taxpayer to claim an exemption under both choices concerning the sale of the same home is unrestricted.

edited and proofread by nikita sharma 

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