Tax saving tips: Invest in real estate and save tax on LTCG

Investments in real estate are borne out of savings made out several years of earnings. These investments have both monetary value and emotional value for investors. Individuals buy and sell real estate to reinvest in upcoming real estate projects, to meet growing family needs, to move to another location of choice etc. Since real estate investment involves a large amount of money, the sale of property results in large gains. Tax may have to be paid on these gains unless they have been invested. Let’s find out how to save tax on sale of a property.

Taxpayers can save the taxes on the gains by availing the benefit of tax exemptions allowed under the Indian tax laws. The law allows a taxpayer to invest in real estate and avail the benefit of exemptions on taxable gains realised on the sale of assets or real estate.

A. Tax saving exemptions:

I. Investment in real estate upon exit from a real estate property

Individuals who have earned gains upon exit of a residential house and wish to reinvest in another residential house can avail of an exemption from taxation of the capital gains.

For example:

Mr A sells his residential house on 5th April 2018 for Rs 50,00,000. Mr A had bought the house for Rs 20,00,000 on 25th March 2013. With the proceeds of the house, Mr A purchases a new residential house for Rs 60,00,000. The calculation of the capital gains and the exemption would be as below:

To claim this exemption the property which is sold should have held by a taxpayer for more than 2 years.

The above exemption is now extended w.e.f 1 April 2019 to investment in 2 residential properties (once in a lifetime benefit), the one condition being that the gains are not above 2 crore rupees.

II. Investment in real estate upon the sale of any other asset

Individuals who have earned gains upon sale of any other asset and desire to invest in a residential house can avail an exemption from taxation of the capital gains. Other assets would include land, gold etc.

Illustratively:

Mr B sells a plot of land on 5th April 2018 for Rs 80,00,000. Mr B had bought the land for Rs 40,00,000 on 25th March 2013. With the proceeds of the land, Mr B purchases a new residential house for Rs 60,00,000. The calculation of the capital gains and the exemption would be as below:

To claim this exemption the property which is sold, should have held by a taxpayer for more than 2 years.

B. Other conditions attached to the exemptions mentioned above:

Period available for investment:

A taxpayer can acquire a residential house within a span of 2 years. A residential property which has been purchased a year before the sale would also qualify for an exemption. In the case of under construction properties, taxpayers have up to 3 years to complete the construction.

Deposit in Capital gains account scheme:

Taxpayers who are unable to invest the proceeds/capital gains have the benefit of depositing the amount of gain/sale consideration in a Capital gains account scheme. The deposits have to be made with any branch of a public sector bank on or before the due date for furnishing of the income tax return of the year in which property was sold.

Taxation of the unutilised amount in the Capital gains account scheme:

Taxpayers have to utilise the amounts deposited in the Capital gains account scheme. If they fail to utilize this amount within the specified time, they will have to pay tax on the gains which were earlier exempted at the end of 3 years from the date of sale of the property/asset.

The author is ClearTax CEO. Views expressed are his own