Here, we discuss the income tax after sale of property or tax after sale of property
Or, tax on sale of house property or tax on sale of residential property
Here, we focus on the tax impact on the sale of residential property
We discuss the tax on capital gains made on the sale of residential property
In a subsequent presentation, we cover how income tax exemption on property sale
Here, we broadly cover strategy for tax deduction on sale of house property
We are referring to self-occupied or let out residential property
Tax treatment of capital gains depends on how long you stay invested
2 years is the cut-off period
It is treated as short-term capital gains if the property is held for less than 2 years
Gains made on property held for 2 years or more is considered long term capital gains
For short term capital gains, you pay short term capital gains tax i.e your income tax rate
You pay tax according to your income tax slab
For long term capital gains, you get inflation indexation benefits
The cost of acquiring and improving the property gets You can deduct transaction costs from sale proceeds for short term capital gains enhanced
In the same proportion as the increase in the inflation index during the holding period
They get deducted from the sale proceeds for calculating capital gains tax liability
Inflation indexation benefits lead to lower taxable capital gains
Eligible transaction costs like brokerage can also be deducted from sales proceeds
You can deduct transaction costs from sale proceeds for short term capital gains
But don’t get inflation indexation benefits
For long term capital gains tax, you pay 20%
This is lower than the income tax rate in the highest slab for short term capital gains
So, the longer you hold the property, the lesser tax you pay
Understanding tax on capital gains from property sale help you in tax planning to minimise tax outgo
You have a choice of paying capital gains tax on property sale and get the money or save tax
If you take the right steps, you become eligible for tax benefits to save capital gains tax
For tax savings or tax deductions for capital gains made from property sale you have two routes
You can re-invest capital gains in a ready to move in property or one under construction
The other route is to save tax by investing in capital gains tax saving bonds
These are bonds issued by institutions such as REC, NHAI and PFC
Here, you can save long term capital gain tax on capital gains up to Rs 50 lakh
You can re-invest in upto 2 properties for capital gains not exceeding Rs 2 crore
Assuming sales proceeds of Rs 1,000, cost of acquiring Rs 500, cost of improvement Rs 100 and Rs 50 as brokerage
Your short term capital gains is Rs 350 on which you pay tax according to your income tax slab
If the inflation went up by 10% during the period of investment
The cost of improvement also needs to be enhanced in the same proportion as the rise in inflation index
Brokerage can be deducted from sale proceeds for calculating long term capital gains
You pay 20% long term capital gains tax on the reduced taxable capital gains
You become liable to pay capital gains tax for the financial year in which you sell the property
Re-investing capital gains in another property can take time. Park the money in a capital gains account
These accounts are available in public sector and other banks
You are allowed to buy a property under construction up to 3 years after the sale of the property
For a ready-to-move-in property, you need to buy the home 1 year before selling the property or 2 years after the property sale
The part of capital gains not used in property re-investment is taxed
Capital gains account money not used within stipulated time limits is fully taxed
You also lose the tax benefits from property re-investment if you don’t stay invested for at least 3 years
The other option is to invest up to Rs 50 lakh in capital gains tax saving bonds where money is locked in for 5 years