Discover effective strategies to save capital gains tax on sale of property – such as reinvesting gains and utilising exemptions such as Section 54 and other tax saving options.
In this blog, you will learn how to save capital gains tax on sale of residential property, by reinvesting gains and leveraging exemptions such as Section 54 and the Capital Gains Account Scheme. Whether you are managing long-term capital gains tax on property or addressing short-term capital gains tax on property, key tax saving options are explained below.
Table of Contents
What is Capital Gains Tax?
This is a levy imposed on the profit realised from the sale of an asset, such as residential property. This tax is calculated as the difference between the current sale price and the original purchase cost, with adjustments for inflation through indexation where applicable.
When you aim to save capital gains tax on property, it is vital to understand how this tax works and how effective planning can help you in this regard.
Difference Between Short-term and Long-term Capital Gains
When you sell property, the profit can either be classified as short-term or long-term capital gains. If you have held the property for less than 24 months, any profit realised is categorised as short-term capital gains (STCG). STCG is taxed according to your applicable income tax slab, which means that your tax rate could vary from 5% to 30% depending on your total income.
In contrast, if you have owned the property for more than 24 months, the profit is treated as long-term capital gains (LTCG). LTCG benefits from indexation, which adjusts the original cost for inflation and thereby reduces the taxable amount. This mechanism provides an effective way to save capital gains tax on sale of property, by lowering the overall tax burden.
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Current Tax Rates for STCG and LTCG
To save capital gains tax on property, it is important to be aware of the current tax rates:
- For short-term capital gains, the profit is taxed as per your personal income tax slab, which can range from 5% to 30%
- For long-term capital gains, a flat rate of 12.5% without indexation or 20% with indexation applies after considering indexation benefits; this favourable rate can be highly beneficial when you plan to reinvest the gains
Additionally, you may utilise tools such as income tax calculator to determine your exact tax liabilities. This clarity assists you in understanding how to save capital gains tax on property in India and how to choose the best reinvestment options to further reduce your tax burden.
9 Ways to Save Capital Gains Tax on Sale of Residential Property
When you sell a residential property, understanding how to save capital gains tax on sale of property is essential. You can employ various strategies that not only help reduce your tax liability, but also maximise your net returns. Described below are 9 methods that provide clear guidance on how to save capital gains tax on property in India, along with relevant details and statistics where available.
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Reinvest in Another Residential Property (Section 54)
When you sell a residential property, you can claim exemption under Section 54 if you reinvest the long-term capital gains in another residential property. The new property must be purchased within 1 year before or 2 years after the sale or constructed within 3 years of the sale date.
This method helps you save capital gains tax on sale of property, as it only applies to long-term capital gains. Recent data indicates that many homeowners have benefitted from this exemption, reducing their effective tax burden by up to 20% after indexation adjustments. -
Invest in Capital Gains Bonds (Section 54EC)
This allows you to save capital gains tax on property by locking in tax benefits. You can invest up to ₹50 lakh in bonds issued by REC or NHAI, within 6 months of the sale. Though these bonds carry a 5-year lock-in period, they offer interest income and serve as an attractive alternative if you are not planning to reinvest in another residential property. This method has proven popular among investors looking to mitigate tax liabilities without real estate reinvestment.
Read More: Why Apartments with Amenities Are the Future of Urban Living in India
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Utilise Section 54F for Other Asset Sales
Section 54F provides exemption, if you sell any capital asset (other than a house) and reinvest the entire sale proceeds in a residential property. The conditions require that you should not own more than 1 residential property before reinvestment, and full exemption is available only if the entire sale amount is reinvested. This approach is particularly useful if your sale involves non-residential assets, enabling you to save capital gains tax on sale of property through effective reinvestment planning.
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Deposit in Capital Gains Account Scheme (CGAS)
If you need additional time before reinvesting, depositing the capital gains in CGAS is an excellent strategy. This allows you to maintain the exemption, by holding the gains in a designated bank account until you purchase or construct a new property. To avoid taxation, the funds must be utilised within a specified period – usually 2-3 years.
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Adjust Capital Gains with Capital Losses
Reducing your overall tax liability is possible, by offsetting capital gains with any capital losses from other investments. Short-term losses can be set off against both short-term and long-term gains, while long-term losses are restricted to long-term gains. Any remaining losses can be carried forward for up to 8 years. This method effectively lowers your taxable gain, and is a key strategy to save capital gains tax on property sale.
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Claim Tax Benefits Under HUF or Joint Ownership
If the property is held under a Hindu Undivided Family (HUF) or is jointly owned, you can distribute the capital gains among the co-owners. By doing so, each owner might fall into a lower tax bracket, thereby reducing the individual tax liability. This method offers a practical approach to save capital gains tax on sale of property, by utilising the benefits of shared ownership and family tax planning.
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Plan Your Sale Timing to Reduce Tax Impact
Strategically timing your property sale can have a significant impact on the tax liability. Sell the property after a holding period of more than 24 months, to ensure that the gains are classified as long-term capital gains – attracting a lower tax rate of 20% with indexation benefits. Additionally, if you plan multiple sales, spread them across multiple financial years or choose a year with lower overall taxable income, to further save capital gains tax.
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Reduce Selling Expenses
One effective method to lower your capital gains tax liability is to deduct all eligible selling expenses from the sale proceeds. These expenses can include brokerage fees, legal charges, stamp duty, registration fees, advertising costs, and even home improvement expenses incurred prior to the sale.
Since these gains are calculated as Sale Price minus (Cost of Acquisition + Cost of Improvements + Selling Expenses), maximising these deductions can significantly reduce the taxable gain and help you save capital gains tax on sale of property. -
Reinvest Gains into Shares of Manufacturing Company (Section 54GB)
Under Section 54GB, you can save capital gains tax on property by reinvesting long-term capital gains in equity shares of an eligible manufacturing company or startup. To qualify, the company must be recognised as a small or medium enterprise (SME) under the MSME Act, 2006, and the investment must be made before the due date for filing your income tax returns.
Furthermore, the invested funds must be utilised for purchasing new plant or machinery within a stipulated period. This option not only provides tax benefits, but also diversifies your investment portfolio.
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By implementing one or more of these 9 strategies, you can effectively plan your property sale tax and capital gains tax saving options. Each method offers unique benefits that enable you to save capital gains tax on sale of property, while enhancing your overall financial planning. Always verify the current guidelines and consult a tax professional, to tailor these strategies to your individual circumstances.
Conclusion
Maximise your returns by employing the effective strategies described in this blog, to save capital gains tax on sale of property. By reinvesting in another residential property, investing in capital gains bonds, and utilising exemptions under Sections 54, 54F, and 54GB, you can significantly reduce your tax liability.
Utilising tools such as capital gains tax on sale of property in India calculator and carefully planning your sale timing can further optimise your tax savings. Whether you aim to save capital gains tax on property for long-term benefits or manage short-term liabilities, these methods provide clear guidance on tax benefits for homeowners. Always verify the current tax regulations and use expert advice to tailor these strategies to your specific circumstances.
FAQs
1. What is the capital gains tax on selling residential property in India?
Capital gains tax on selling residential property in India is 20% after indexation, for properties held for 24 months or more (LTCG); and standard income tax slab rates for properties held for less than 24 months (STCG). The tax is applicable on the profit earned, which is the difference between sale price and indexed cost of acquisition and improvement.
2. How can I avoid paying capital gains tax on the sale of my house?
You can avoid paying capital gains tax on the sale of your house, by reinvesting the gains in another residential property under Section 54, investing in specified capital gains bonds under Section 54EC, utilising Capital Gains Account Scheme (CGAS) for temporary deferral, or planning the sale timing to ensure LTCG benefits (>24 months).
3. What is Section 54 and how does it help in saving capital gains tax?
Section 54 helps in saving capital gains tax, if you reinvest the sale proceeds in another residential property. The exemption requires that the new property be purchased 1 year before or 2 years after the sale, or constructed within 3 years.
4. Can I invest in multiple properties to claim exemption under Section 54?
No, you cannot invest in multiple properties to claim exemption under Section 54, as the benefit is available only when the entire capital gains are reinvested in a single residential property. In cases involving sale of assets other than a house, Section 54F may apply with its own specific conditions.
5. What is the lock-in period for capital gains bonds under Section 54EC?
The lock-in period for capital gains bonds under Section 54EC is 5 years. Investing up to ₹50 lakh in these bonds within 6 months of the property sale enables you to save capital gains tax, although the investment cannot be withdrawn in the entire lock-in duration.
6. Can I claim exemptions under both Sections 54 and 54EC?
No, you cannot claim exemptions under both Sections 54 and 54EC. You can choose the exemption that best suits your situation, as each section addresses a distinct method of saving capital gains tax on sale of property.
7. What happens if I deposit capital gains in Capital Gains Account Scheme (CGAS), but do not reinvest?
If you deposit capital gains in Capital Gains Account Scheme (CGAS) but do not reinvest, it preserves the tax exemption temporarily until you purchase or construct a new property. However, if the gains are not reinvested within the prescribed period (usually 2-3 years), the exemption gets lapsed and the gains become taxable.
8. Is capital gains tax applicable if I gift my house to a family member?
Yes, capital gains tax is applicable if you gift your house to a family member. The tax liability generally gets transferred to the recipient, based on the fair market value of the property at the time of transfer, subject to applicable tax provisions.
9. Can NRIs claim capital gains tax exemption under Section 54?
Yes, NRIs can claim capital gains tax exemption under Section 54, provided they adhere to the same conditions as resident taxpayers. This involves reinvesting the LTCG from the sale of a residential property in another residential property within the stipulated timeframe.
10. Can I offset capital gains tax by adjusting losses from other investments?
Yes, you can offset capital gains tax by adjusting losses from other investments. Short-term capital losses can be set off against both short-term and long-term gains, while long-term losses can only be adjusted against long-term gains. Unused losses may be carried forward for up to 8 years, thereby reducing the overall taxable gain.
