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| Edited By: Rishabh Parakh |Source: DNA |Updated: Aug 09, 2018, 06:45 AM IST
Are you aware about the income tax rule with regards to the gains on sale of house property? Let's take an example of Sumit who sold his house on July 12, 2018 for Rs 1.20 crore. The said property was purchased on April 10, 2012 for Rs 75 lakh. This will be a case of Long-Term Capital Gains (LTCG), because the property was held for more than three years. For calculating LTCG, you first adjust the amount you have paid for purchasing the property towards cost inflation and the resultant indexed cost of acquisition will be used to derive the capital gains.
In this example, the indexed cost of acquisition comes to Rs 1.05 crore (Rs 75,00,000X280/200) and the net capital gains comes to Rs 15,00,000 (1,20,00,000-1,05,00,000). There is a flat 20% rate on this LTCG, which results in to a total tax liability of Rs 3,00,000 (15,00,000X20%). Now the question is how to save this capital gains tax. There are certain provisions given under the Income Tax Act, which help you save this tax. Let us understand in detail.
Section 54 allows you to save the entire tax in case you reinvest the capital gain amount for purchasing another house. The amount you need to invest is not the total money you have received on sale, but only the amount of capital gain. In this example Sumit need not invest the entire Rs 1.20 crore, but only Rs 15 lakh. Practically, the new property may be for a much higher amount than the original sale proceeds as received or may be higher than the amount of capital gain amount. In either case, the exemption amount will be restricted to the total capital gains as made.
Sumit can purchase the new property either within one year before the sale transaction or two years from the date of sale of the house. He can also invest in an under-construction property, but needs to make sure that construction gets completed within three years from the sale date. The said exemption benefit will be reversed if you sell this newly purchased property in another three years from its purchase or completion date.
In case you do not intend to buy another property then there is another section 54EC, which allows you to invest the capital gain amount (Rs 15 lakhs in our example), in capital gains bonds. These bonds are issued by National Highway Authority of India or Rural Electrification Corporation. The invested money can be withdrawn at the end of five years and the return is 5.75%, which is taxable. This investment should be made within a period of six months from the date of sale.
The I-T department has given one leeway to invest capital gains money in an account with any Public Sector Undertaking or other banks under the Capital Gains Account Scheme, 1988. So, till the time you finalise the property deal within a timeline, you can deposit the money in a designated account and the same will be exempted from capital gains. But if you do not make the property purchase within the timeline, then the said deposit will be treated as a short-term capital gain. The timeline to make this deposit is on or before the due date of filing your tax returns, that is, July 31, (typically) for a particular financial year in which you have sold the property.
The writer is chief gardener, Money Plant Consultancy
