Selling a property is a massive and time-consuming operation in and of itself. Oh, did you think that was the end of all your troubles? Add in the fact that your capital gains will be taxed, and you have the perfect recipe for a headache. You must pay capital gains tax on the profit if you want to sell your property. However, there are various strategies to reduce capital gains tax on property sales. What a relief, right?
Real estate is the best long-term investment choice. It aids in continual passive income and is an excellent approach for future financial stability and security. However, many people are unaware of the capital gains tax. Many find it to be an unexpected tax. In some cases, it can be a hefty tax that eats away at the profits you make when selling a home. The amount of capital gains tax you pay is determined by whether the profits are short-term or long-term. Short-term capital gains get added to your taxable income, and you must pay income tax per the various tax slabs. Long-term capital gains get taxed at a rate of 20%.
Individuals who earn more than the exemption level must pay tax to the government. Similarly, in addition to salary income, one must pay tax on capital asset sales. According to the Income Tax Act of 1961, capital gains deriving from the transfer of capital assets, such as gold, stocks, a home, or property, are subject to capital gains tax. However, the government has provided a list of specific advantages to taxpayers to provide relief and save tax on capital gains if requirements get met. There is some relief for Short Term Capital Gains (STCG) tax, while the government has implemented procedures to save for Long Term Capital Gains (LTCG) tax.
So, what exactly is this capital gains tax in real estate?
Capital gains are the profits made when you sell a capital asset — a plot of land, a residential house, a commercial structure, or any other capital asset – for a higher price than you paid for it. Furthermore, these capital gains get taxed under the Income Tax Act. Capital gains tax can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG), depending on the holding duration of property.
So, Long-Term Capital Gains (LTCG) are taxed at 20% depending on an individual’s tax level.
In India, property owners must pay capital gains tax on the sale of residential property. The reasoning behind the capital gains tax on residential property sales—the sale of property often results in profits for the owner. Whether you’re purchasing or selling a home in Pune or any, paying capital gains tax is one step to save yourself.
And what does a long-term capital gains tax mean?
Have you ever made a real estate investment or kept the property for two years before selling it? If you sold it after two years, you must have heard your accountant use the phrase “long term capital gain tax.”
A capital gain is money made from the sale of a capital asset. Capital gains get classified into two categories: Long-term capital gains and short-term capital gains. Long-term capital gains are profits from selling property held for longer than two years (24 months). Short-term capital gains are profits from selling property held for two years.
So, capital gains are taxed because they are considered income. This tax gets levied in the year your capital asset gets sold. Therefore, a long-term capital gain tax gets levied on long-term capital gains or profits from selling a property after two years.
Also, long-term capital gains tax on the sale of a real estate property attracts a 20% tax held for two years or more.
Long-term capital gains are susceptible to tax deductions. It implies that if you follow specific standards outlined in the Income Tax Act, you can legitimately save on long-term capital gains tax. One of the requirements for avoiding capital gains tax is to reinvest the proceeds from selling a property as a residential property.
Now, how do I save long-term capital gains tax on real estate?
If you sell your home, you must pay capital gains tax on the profit gained after considering factors such as inflation and indexed cost of purchase, among others. However, you can implement strategies to save on capital gains tax on property sales. Here we go:
- Bonds investments: If you recently sold your home, you should consider investing in certain financial assets. It will assist you in saving capital gains since long-term capital gains get excluded under Section 54EC of the Indian Income Tax Act, 1961. To qualify for capital gains tax exemption, you must invest the amount earned in bonds within six months of the amount and realization of profits. Furthermore, the assets must get invested in these bonds for at least three years as a lock-in period. If the funds are held in these bonds longer than the three-year lock-in term, there will be no interest paid on them, and the redemption of these capital gains bonds will become automatic. Furthermore, you are not permitted to assign, contract, or exchange these bonds.
- Reinvestment of gains: Section 54 of the Income Tax Act states that an individual or HUF can utilize capital gains from selling a property to buy or build another residential property, therefore avoiding capital gains tax. Only capital gains, not the whole selling profits, must be reinvested. Furthermore, taxpayers can invest capital profits in up to two residential homes. Section 54 also states that if a long-term home property is sold or transferred and the earnings get invested in another residential house, the capital gains achieved or the cost of the new asset, whichever is lesser, might be exempted. The limitations are that capital gains cannot exceed two crores and that the taxpayer can only claim exemption on two properties once. Section 54 of the Income Tax Act imposes requirements for capital gains exemption. Capital gains must get reinvested in a residential property in India. Also, the new acquisition must get made within one year after the capital gains get reinvested. If the capital gains get utilized to build a dwelling, it must finish within three years after the property’s sale. Furthermore, the new property in which capital gains gets invested must not get sold before three years from the date of purchase; otherwise, the claimed exemption will get taxed in the year the new house property gets sold. Furthermore, if the capital gains on the sale of a house are 50 lakh and the new property is acquired for 40 lakh, the first 40 lakh will be tax-free. The remaining ten lakh will be subject to long-term capital gains tax.
- Investment in a Capital Gain Deposit Account Scheme: Another way to reduce capital gains tax on property sales is to invest in a Capital Gains Account Scheme (CGAS). This strategy is ideal for those unable in a brand-new house before completing their income tax returns, and it gives significant assistance to taxpayers. You can invest in this CGAS program for three years and use the capital gains to buy or build a residential residence on your land during that time. The deposit in this CGAS account must get made before filing or registering an income tax return. The investment must also indicate in the income tax return. Only a few banks are authorized to open CGAS accounts. To save taxes on capital gains, deposits in this account can be made in monthly installments or as a single payment.
- Indexation Benefits: Indexation is adjusting the purchase price of a property for inflation. The indexation benefit enables the seller to account for the effects of inflation on the cost of acquisition. It essentially reduces the amount subject to capital gains tax. The LTCG tax gets calculated by subtracting the house’s indexed cost from its net sale price. You are eligible for indexation relief on long-term capital gains. If you purchased a home in 1994-95 for Rs 20 lakhs and sold it in 2015-16 for Rs 1 crore, your long-term capital gains will not be Rs 80 lakhs. But, 16.52 lacs.
Investing in real estate properties may help you build assets that will provide you with financial security and stability in the future. However, one unavoidable consequence of selling property in India is capital gains tax. But, by employing any of the options outlined above, you can avoid paying huge sums in capital gains tax. As a result, by taking advantage of tax-saving measures, you may get the most out of your home investment.
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How To Save Long Term Capital Gains Tax FAQ’S:
You can avoid paying capital gains tax legally by utilizing the following strategies.
- Bonds investments
- Reinvestment of capital gains
- Investment in a Capital Gain Deposit Account Scheme
- Indexation Benefits
The highest capital gains exemption amount for 2021 that may get claimed is Rs 50 lakhs. Capital gains should get invested in long-term designated assets, such as bonds redeemable after 5 years issued by NHAI, RECL, or any other bond specified by the Central Government.
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