Tips to save capital gains tax on sale of your residential house
If you sell your house at a profit, you are required to pay tax on the same. This article will summarize the ways to minimise and perhaps tip to save taxes when your property is sold. You can save 100% of taxes, if you do effective legtimate tax planning mentioned in this article.
- When are you required to pay tax?
- Do you have to pay tax on your house sold?
- What are Capital Gains?
- How to save Capital gains tax?
- Which section provides for exemption from capital gains tax?
- Who is entitled to benefit of exemption from capital gains tax?
- Don’t sell your house before a specific date …
- Purchase/ construct a new house before a specific date …
- How much tax did you save ?
When are you required to pay tax?
Total income of a tax payer in India is taxable under the provisions of the Income-tax Act, 1961. You pay tax on your salary income, on your business profits etc. You also pay tax on rental income derived from your leased house or any other property. Tax is also paid on other sources such as bank interest, commission, tuition fees, other interest, lottery income, gambling income, any other residuary type of income. But did you know you have to pay tax even on your personal house, if it is sold.
Do you have to pay tax on your house sold?
In case your residential personal house is sold by you then you have to pay tax. Such tax is payable not on the sale proceeds but only on the gains derived by you from such sale of your house property. Such gains are technically called as Capital Gains. Capital Gains are taxable under the Income-tax Act, 1961.
What are Capital Gains?
Capital Gains are computed in accordance with provisions of section 45 of the Income-tax Act, 1961. In simple language, capital gains are the difference between sale consideration and cost of your house. In case there is improvement in your house, then even cost of improvement is allowed as a deduction. In case your house qualifies to be a long term capital asset then the benefit of indexation is also provided to you.
How to save Capital gains tax?
Having said that you have to pay tax on Capital Gains. The million dollar question now that arises is how to save such tax on Capital Gains. There are provisions under the Income-tax Act, 1961 which allows you to save tax on such Capital Gains. These provisions are discussed briefly and should not be considered as legal opinion. Especially because the tax laws are open to different interpretation by various authors in India. Secondly, more so because the tax laws keep on changing each year and amendments are incorporated every year and thirdly because a new direct tax code would be introduced in place of the present tax law.
Which section provides for exemption from capital gains tax?
Section 54 of the Income-tax Act, 1961 provides exemption for profits derived from sale of residential property provided the conditions mentioned in that section are effectively fulfilled. The detailed conditions, requirement of Section 54 are discussed in brief in the ensuing paragraphs.
Who is entitled to benefit of exemption from capital gains tax?
Benefit of this section can be taken only by individual or a Hindu Undivided Family. Thus, benefit of this section is not available to Company.
Don’t sell your house before a specific date …
Benefit is available to a residential house only if such house is held for more than 36 months before the date of transfer. Hence in order to qualify for exemption you are required to hold the house for more than 36 months and can sell only after that period if you want to really get the exemption benefit of that section.
Purchase/ construct a new house before a specific date …
The tax payer is required to purchase a new residential house within one year before the date of sale or 2 years after the date of sale. In case of construction the period is extended to 3 years after the date of sale.
How much tax did you save ?
In order to find out how much amount of capital gains would be exempted under this section, you are required to compare the cost of new house with amount of your capital gains. If cost of your new house is greater than your capital gains then you would be required to pay zero tax on your house sold. In case capital gains are greater than the cost of new house, you would have to pay tax on the difference.
So the next time whenever you sell your house, please keep in mind the above provisions to get the maximum advantage of the tax benefit.