Over the years, property is one of the high ticket items in one’s investment portfolio. Now the buying / selling are more frequent with good appreication. However, the investor needs to consider taxation aspects when buying & selling properties.
Any profit earned on sale of property is taxed as Capital Gains. The amount of tax depends of holding period of the property.
| Short Term Capital Gain | Long Term Capital Gain | |
| Holding Period | Asset Held of less than 3 years | Asset Held of more than 3 years |
| Tax | Added to Income and taxed at Individual’s slab rates | 20% after Indexation |
For long term capital gain, tax liability is determined based on indexed cost of acquisition and improvement. Check – Cost Inflation Index & Calculation
How to Save Capital Gains Tax on Sale of Property in India
a) Invest in a Residential House (Buy / Construct) (Under section 54F)
The seller of the property can claim for tax exemption if he buy another essential property. However, the amount of investment & exemption depends on the type of Capital asset sold. .
| If Capital Gains is from Sale of | Amount to be invested |
| Residential property (Completed / Ready to Move) | entire Profit (capital gain) |
| Under Construction Property / Commercial / Non Agricultural Land |
entire SALE Proceeds |
The seller has two options, either he can buy another house within two year from sale of property else he can build a house in three years. Buyer can also buy a house 1 year prior to selling the house and still can avail the benefit under section 54.
However, following conditions needs to be adhered
- You can only invest in Residential property. This means you cannot invest in a commercial property or land to save tax.
- You should not own more than one house prior to the investment.
- If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
- if any additional house (other than the new residential house referred above), is purchased within a period of two years or constructs within a period of three years after the date of transfer of capital asset, then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired
Capital Gains Accounts scheme – If you could not invest the amount in another property before due date if filing the returns, you can deposit the amount into a bank account under the Capital Gains Accounts Scheme, 1988. Such amount would have to be utilized for the purchase or construction of the new asset within the prescribed time period. Unutilized amounts would be taxable as income of the previous year in which the period of 3 years from the date of the transfer of the original asset expires.
2) Invest in Capital Gain Bonds (Section 54EC)
Irrespective of the type of property, here you need to just Invest profit (capital gains) into Capital Gains Bonds. You can invest in NHAI or REC Bonds upto 50 lakhs in an year.
There is a Lock in of 3 years for such investment. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
Important Note – If you have Capital gains from Under Construction Property / Commercial / Non Agricultural Land – then this option is more beneficial as you need to invest only profit amount & not the entire sale amount.
For calculating Capital Gains, the date of Acquisition is quite important to calculate the index cost.
Date of Acquisition of Capital Asset
1) Completed Ready to Move Properties (Residential / Commercial / Land etc)
Date of Acquisition – will be Date of Sale deed registration
2) Under Construction Properties (Important to Read)
If the property is under construction, you don’t have the physical property yet. What you have is “RIGHT TO ACQUIRE” a particular property.
When you book a flat, you pay a token amount as Booking amount for which a receipt will be issued by builder. Once the layout is finalised, letter of allotment is issued and an agreement to purchase is executed and registered.
If you have merely booked a flat in the building to be constructed with no particular flat having been allotted to you, you cannot be said to have acquired the right to purchase a specific flat.
It is only when the letter of allotment is issued that such a right can be said to have come into existence. The purchase agreement defines the rights between the parties, which have already come into existence after the issue of the letter of allotment.
Thus, the date of issue of an allotment letter gives a right to the intended buyer to obtain conveyance on the said flat so that it becomes an asset within the purview of the Income-tax Act.
The date of acquisition of the said asset (“Right to Acquire”) shall be the date on which the allotment letter is issued to the intended buyer.
Normally, in cases of sale of under construction properties, a tripartite agreement is entered into between the seller (who had originally booked the flat), the purchaser and the builder. Under this agreement, the seller assigns his rights to the under-construction flat to the purchaser with the consent of the builder, the purchaser agrees to pay the balance of the original purchase price payable to the builder and the builder agrees to give possession of the ready flat to the purchaser directly.
The agreement assigns the right to acquire a particular flat.
IMPORTANT NOTE – Once the possession is given, then the new date of Sale deed registration of property will be treated as New date of Acquisition, as now you will have a NEW Asset.
So if you intend to sell property in near future, it is better to sale before possession / deed registration. Otherwise, you will have to wait for another 3 years to get benefit of Long term capital gain.
Recently, High court has taken a view that – for calculating Long term capital gains, the date of allotment should be treated as date of purchase. Link