9 different ways to save tax when you sell a house

If you are planning to sell your property, you'll have to pay capital gain tax on the profit earned after considering the inflation and indexed cost of acquisition

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Whenever you sell a property, you have to pay tax on it, which is termed as capital gains, and any property sold after at least two years falls under long-term capital gains. Long-term capital gains are taxed at a flat rate of 20 per cent.

The capital gain tax is to be paid on the profit earned after considering the inflation and indexed cost of acquisition. 

Indexation is basically a technique to adjust the cost of the asset according to the inflation index. It will increase your cost and reduce your gains and thereby, tax liability.

"So under long-term capital asset, the benefit of indexation is available plus the person who falls in the tax bracket of 30% also get the advantage of paying the lower tax rate of 20%," according to ClearTax.

 Ankit Jain, Partner, Ved Jain & Associates. explains the several ways to save on the capital gain tax on the sale of property. 

 Avail Indexation Benefit: One effective method to reduce the tax on the sale of a residential property is to take advantage of the indexation benefit. Indexation adjusts the purchase cost of the property to account for inflation. This effectively lowers the amount of capital gains and subsequently the tax on it.

For property owners to leverage this benefit, they should hold the property for at least two years, as this benefit is only available for long-term capital gains.

2. Joint Ownership: If you have co-owned the property, capital gains from the sale can be divided amongst the co-owners, depending on their ownership share. By doing this, each co-owner can make the most of the basic exemption limit available to them, thereby possibly reducing the overall tax liability.

3. Reduce Selling Expenses: Remember that when you're calculating capital gains, you can deduct certain selling expenses from the sale price. Key expenses like brokerage fees associated with the sale can be deducted, thereby lowering the capital gains and in turn, the tax payable.

To reduce the capital gains tax on selling a house, you can also live in the house for more than two years and keep receipts of all the expenses made on enhancing or renovating it. These expenses can be added to the cost of the house and help lower the taxable capital gain amount. 
 

4. Buy New Property (Exemption under Sec 54): One of the most popular methods of saving tax on the sale of residential property is to reinvest the capital gains in another residential property. 

   

   - Purchase a new property either one year before or two years after the sale.

   - Alternatively, construct a new property within three years post-sale. If you book a flat with builder, please make sure that the flat's completion date is well within the three year period. 

Long-term capital gains are exempted from taxation (under Section 54 of the Income Tax Act, 1961) for individuals and Hindu Undivided Families on the sale of a house property if:

1. The capital gains are used to purchase or construct another house.
2. The new house is purchased one year before or two years after the sale of the old house.
3. The new house was constructed within three years after the sale of the old house.
4. Only one additional house property is purchased/constructed.
5. The property being bought/developed is within India’s national borders.
6. You don't sell the new house for three years after taking possession of it.
7. If the cost of the new property is lesser than the sale amount, the exemption then only applies proportionately. The remaining money can be re-invested under Section 54EC in under six months.

"For example, in the case of Section 54, if a person made a long-term gain of Rs 5 crore from selling a house and spent Rs 3 crores on a new house, with an additional Rs 2 crores in the Capital Gain Account Scheme, the total exemption would be Rs 5 crore," said  Pallav Pradyumn Narang, Partner, CNK.

5. Buy New Residential Property (Exemption under Sec 54F): In cases where you sell an asset other than a residential property but use the proceeds to acquire a new residential property, you can claim an exemption.

   

   - The new house must be purchased either one year before the sale or two years after the sale, or it should be constructed within a span of three years post-sale.

   - For full exemption, the entire sale proceeds must be reinvested. If only the capital gain is used, then the exemption is granted proportionally.

   - While claiming this exemption, the seller should not have more than one residential property, excluding the newly bought one.

6. Investment in Bonds (Exemption under 54EC): If you're not keen on reinvesting the capital gains in property, consider putting them into bonds. By investing your capital gains in bonds specified by the government, you can achieve an exemption from tax. Make sure to invest within six months of the property sale to claim this benefit. These bonds have a lock-in period of 5 years.

Suppose, Mr. A is incurring long term capital gains of Rs.30 lakhs on sale of his flat. He is considering to invest the gains in bonds issued by NHAI. So, the capital gains can be invested in the bonds issued by NHAI and can be claimed as an exemption and the whole of capital gains shall be exempted of Rs 30 lakh.

7. Tax Loss Harvesting : An astute financial strategy often used by investors involves selling securities that have experienced a loss. By realizing, or "harvesting" a loss, investors can offset taxes on both gains and income. Losses from sales of mutual funds or shares can be used to offset capital gains on property sales. Moreover, this approach can be useful in rebalancing one’s portfolio.

8. Invest the capital gain in Capital Gain Account Scheme (CGAS) – If you are not able to purchase a suitable house or construct or are not able to find a suitable bond, then you can invest in CGAS of public banks for that assessment year. While filing income tax returns, you can claim exemptions for money in CGAS. However, the deposited amount in CGAS should be utilized within 3 years, or else you will be taxed for that amount. 

9. Reinvest gains into shares of company engaged in manufacturing
There is also a  relatively less known provision, Section54GB, wherein any individual can reinvest long term capital gains from the sale of a residential property into the shares of an eligible company which is engaged in the manufacturing activities, according to Narang. The limit for such reinvestment is Rs 50 lakh with the investor having to acquire more than 25% of the voting rights or 25% of post money share capital in the Indian MSME Company.