Are you selling your house? There are some tax implications that you always have to keep in mind. In case you do not choose the right time to sell your property, you may have to fork out huge taxes. In case your home is sold within just three years of purchasing it, any profits from the sales transaction is taken as a short-term capital gains in your hands.
This will be added to the owner’s income and will be taxed as per the applicable slab rate. For those bringing home more than Rs.10 lakh annually, this will lead to 30% being deducted from the profits. Also, in case a home is sold within 5 years from the end of the financial year in which it was bought, the tax benefits claimed earlier will be reversed. The tax deductions claimed for stamp study, principal repayment and registration as per Section 80C will be reversed and the entire amount will be taxable in the year of sale itself. Only the deductions in payment of interest will be kept unchanged.
You should hold onto your property for a minimum of 3 years before selling it. In case you sell after 3 years, it will be taken as long-term capital gain and will attract taxes of 20% post indexation. Indexation will consider the inflation during this holding period and will adjust the buying price likewise, thereby reducing your overall tax liabilities. You can also get several long term capital gains exemptions but there are none available in case of short term gains. As per experts, expenditure on renovation and repairs can be tallied with the acquisition cost of the home while working out long-term capital gains. Interest that has been paid in the pre-construction period will also be added to the cost in case you have not previously claimed this as a deduction.
Here are tips on avoiding taxes-
- Use your whole gain from the sale to purchase another home within 2 years/construct another home within 3 years. The property should be purchased in the seller’s name
- When the entire capital gains are not invested likewise, the balance amount will be subjected to long-term capital gains tax. However, the tax exemption will reverse in case your new property is sold within 3 years of acquiring/buying/constructing the same
- You can get exemptions as per Section 54 (EC) by investing in long-term capital gains in bonds of National Highways Authority of India for three years and the Rural Electrification Corporation Limited within 6 months of selling your home. Investments up to a maximum of Rs.50 lakhs can be made in these bonds in a particular financial year.
- Investing the entire capital gains in a technology based startup to get exemption in taxes
- Setting off long-term capital gains from selling the home against other long-term losses arising from other asset sales
- TDS of 1% of the property value has to be deducted while making payment to the seller. Make sure the buyer deposits this amount so that you can claim this later. This can be claimed as a refund in case a loss is incurred on the sale or in case there is exemption from long-term capital gains sought as per the above mentioned methods
- In case the new residential property cost is lower than the sale amount, exemption is proportionately applicable
- The exemption is allowed in case the builder of the new residential property does not hand over the property to you within 3 years of purchase
- Deposit the balance amount in the Capital Gains Account Scheme to be eligible for a deduction in case you are unable to reinvest your gains in buying another home or bonds prior to filing your tax returns for the year in which the sale happened