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Manage your tax outgo when selling property

If gains are reinvested in another property or in specified bonds, tax can be avoided

Arnav Pandya 

Selling a has implications. Since the potential gains from a sale can be high, the subsequent paid on it could be high as well. Similarly, purchasing a can also lead to potential benefits. The benefits related to the repayment of a are well known. However, what needs to be kept in mind is that the benefits depend on the holding period and one needs to match the benefits with the holding period to ensure no higher liability arises in future.

Sale of property

The sale of is a taxable event owing to potential gains from the sale. That's because when this transaction is completed the individual is no longer the owner of the

Two main aspects need to be considered when the sale of the is undertaken. The first deals with the calculation of the quantum of the gains that have been earned on the as this would directly impact the to be paid. The time period of the holding becomes vital here because it is used for the classification of the gains into short term or long term The second aspect deals with the deductions that have been taken for the purpose of the repayment of the If the holding period of the does not cross the specified time limit then these deductions might have to be reversed.

Capital gains: Short or long?
The holding period is significant for the purpose of determining the nature of earned on the sale of Short-term is applicable if the holding period is less than three years. These gains are added to the income of the individual and then taxed at the applicable rate. This could very well mean you may have to end up paying the highest marginal rate at 30 per cent plus cess. Most people would end up paying this rate of on their short-term On the other hand, long-term are taxed at 20 per cent plus cess with the benefit of indexation, reducing the overall burden considerably.

This means that the individual has to hold the for a minimum period of three years to ensure that the gains from the transaction qualify as long-term and the lower rate applies. But even this can be avoided if the individual reinvests the capital gain amount in another or in specified bonds within six months from the date of sale.

Those who cannot immediately purchase another can park the amount earned by selling the in a Capital Gain Account Scheme (CGAS) in any nationalised bank within six months of selling the This amount must be used for buying a new house within two years of parking the amount in the account or used for constructing a new house within three years of parking the amount in CGAS.

Benefit for repayment of housing loan
The Income Act allows an individual to take the benefit of deduction on the interest and capital paid on the Equated Monthly Instalment (EMI) to the financial institution on the The amount under these heads is totalled for the year and the individual can take a deduction under different sections. The interest portion is available for deduction under Section 24 while the repayment of capital is available for deduction along with the other eligible investments under Section 80C.

However, if an individual takes the benefit under Section 80C, he needs to ensure that the house is held or owned for a specified time period; else the benefit will have to be reversed and this would end up affecting the past years for which deduction has been claimed. What is important to note is that the time period for holding under this section is five years, which is two years more than that specified under the provisions.

This means a benefit claimed under Section 80C may be reversed in the year in which the was sold, if the time period of holding the is less than five years from the date of purchase. Individuals need to plan ahead in order to avoid this kind of situation and ensure the holding period is achieved. If they plan to sell the earlier, then it is better that they do not take the benefit of the repayment of the capital.

Conclusion
Individuals need to ensure that the holding period of a before its sale is at least three years in order that the sale qualifies as long-term This is important as the amount here can be quite substantial.

For example, a is purchased in FY1995-96 for Rs 20 lakh and sold in FY2012 for Rs 80 lakh. Net gains for the sale work out to Rs 60 lakh but long-term computed after accounting for indexation benefits amount to about Rs 24 lakh. This bears out the significance of holding the for at least three years, and avoiding paying short-term
The writer is a certified financial planner

COUNTING YOUR GAINS
  • Short-term are added to the income of the individual and taxed at the applicable rate
  • Long-term are taxed at 20% with indexation
  • Interest portion of loan is available for deduction under Section 24
  • Repayment of capital is available for deduction under Section 80C
  • Benefit claimed under Section 80C may be reversed if the holding period is less than 5 years

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