Timing is the most important thing when you sell a house or a property. Else, you will end up paying hefty taxes. To understand how timing affects the tax you have to pay, let’s understand the tax structure on profits from the sale of the property. The profit made by selling a property is called capital gains. Depending upon the duration of the investment, it is further classified as Short term and Long term capital gains.
An investment in an immovable asset like a house, property, land, etc is considered a short-term investment if you hold it for less than 36 months or 3 years. If you hold the asset for more than 3 years from the date of purchase, it is considered a long-term capital gain. So what are the tax implications that depend on the duration of investment holding? Let’s get deep into taxation in both cases.
Short-term capital gains
Taxation can be simple in some cases and also complex in a lot. But, planning carefully can save a lot in your pockets. Say you purchase land on a and sell it within 3 years from the date of purchase. The difference in selling price and the purchase price will be considered an income in the corresponding financial year and is treated as Short Term Capital Gain. Short-term capital gains attract a 30% income tax. It is pretty hefty.
Long-term Capital Gains Tax
Holding the investment in the asset for a period of more than 3 years will make the income as Long term Capital Gains. In such a case, tax liability will be 20% after indexation on the derived income. Indexation takes inflation during the holding period accordingly adjusting the purchase price. It further reduces the tax burden. There are additional tax exemptions for Capital Gains which cannot be available if the asset is sold before 36 months of purchase.
In case, further investment is made on the property for renovation, repairs, or development, it can be summed with the purchase cost while computing the long-term capital gains tax. This will further reduce tax liability on yourself. If the property is purchased through credit finance by banks or NBFCs, the interest paid for the period of holding to the lender can be added to the purchase cost.
There’s another catch in Long Term Capital Gains Tax. If the property is sold before 5 years from the end of the financial year the property was purchased, the tax benefits you claimed during purchase will again become a liability. During the purchase of a Home or Property, the state government levies stamp duty and registration charges which are exempt from income tax. If you sell the said asset within 5 years, the claimed exemption will become void and be taxed in the current fiscal. So, it is advisable to hold a property for more than 60 months from the end of the year of purchase to reduce your tax burden.
How to avoid tax on Capital Gains from Property?
There are multiple options to reduce your tax liability to null. If you buy a new house or property within two years from the date of sale, the income is exempt from income tax. The exemption can also be claimed if you had already purchased an immovable asset 1 year before the sale. The tax exemption is available only if a new asset is purchased in the name of the seller only. This exemption will become void if you sell the new property before 3 years of the date of purchase. Then, it’ll be considered Short Term Capital Gains.
There is another way to get tax exemption. If you invest your Long term capital gains in the bonds issued by Rural Electrification Corporation Limited and National Highways Authority of India for a period of 3 years, the income is exempt from tax. However, there is an upper cap for the investment allowed i.e 50 lakhs in a financial year.
Apart from the above options, you can also set off the long-term capital gains against any long-term losses from other assets. These losses can be carried forward from the past 8 years as well. Capital Gains derived over the long term can only give tax benefits compared to a short term which realizes hefty tax sums.
Conclusion
Investment in Real Estate assets is always profitable and so comes the tax liability with growing asset value. But with proper planning, the tax liability can be completely eliminated. So, it is best to invest in a Home or Land and hold it for a longer period to enjoy tax benefits.
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