Budget 2017 has sops for selling property but restrictions on buying

Holding period for long term capital gains tax brought down to two years from earlier three

A man watches the Union Budget 2017-18 presentation by Finance Minister Arun Jaitley, on TV at a showroom in Kolkata (Photo: PTI)

Last Updated : Feb 01 2017 | 5:01 PM IST

Your tax liability would now be lower when you sell a house in the third year after purchase. You can now claim long term capital gains (LTCG), if you sell a house after holding it for two years from the date of completion. Earlier, one could claim LTCG only after a holding period of three years. The rate for LTCG tax usually works out to be lower compared to short term capital gains (STCG) tax.

LTCG is paid either at flat 10% or 20% after adjusting the property price for inflation. STCG is added to the income of the seller and taxed as per his income tax slab, which comes to 30% if the gains are Rs 10 lakh or more.

While announcing the move, Finance Minister Arun Jaitley said: “This move will significantly reduce the capital gain tax liability while encouraging the mobility of assets."

“The government seems to have made the changes to revive the property market that has suffered due to demonetisation,” says Rahul Garg, partner and leader direct tax, PwC.

Preeti Khurana, a chartered accountant with ClearTax, says that it was a surprise move to see the government giving sops for selling a house for a shorter holding period.

While the government has given relief for selling of property, it has brought down a benefit provided on buying a second house. The government has restricted the interest deduction for second home that buyers get under Section 24.

The buyers will no longer get the entire interest deduction under Section 24. It is now restricted at Rs 2 lakh a year. Earlier, if you bought a second house taking a home loan, you could deduct the entire interest your bank charged from your income. Say, you bought a second property where your interest outgo in the first year is Rs 10 lakh. Assume that you are earning Rs 4 lakh as rent from it. Such buyers were allowed to adjust the different of Rs 6 lakh (Rs 10 lakh interest minus Rs 4 lakh income) against any head of income. However, from the next financial year onwards, they can only get deduction up to Rs 2 lakh. The remaining amount (Rs 4 lakh in the example above), can be carry forward up to eight financial years and can be adjusted later on.