How to Save Capital Gains Tax

The profit earned from selling a capital asset such as immovable property is called capital gain on the sale of the property. Depending on whether you sold the property before or after 3 years determines whether you pay short-term capital gains (STCG) tax at 15% or long-term capital gains (LTCG) tax at 20%. LTCG under certain conditions can also attract a 3% surcharge. To encourage investment in real estate, the Indian government has introduced incentives, such as exemptions to save capital gains tax on real estate, specifically residential properties. Let’s look at how to save capital gains tax on the sale of residential property.

Tips to Reduce Capital Gains Tax on Property:

Reinvest in a Residential Property: Under Section 54 of the Income Tax Act in India, you can claim an exemption from capital gains tax by reinvesting the proceeds from the sale of one property in another residential property within a specified time frame.

Invest in Capital Gains Bonds: You can claim exemption from LTCG under Section 54EC by investing in specific bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC), etc. The maximum limit is Rs. 50 lakh and the lock-in period is five years.

Indexation Benefit: Deduct the indexed cost of acquisition and improvement of the property from the final sale price to reduce the capital gains tax on home sales. Online capital gains tax calculators help calculate tax on the sale of property.

Joint Ownership or Co-ownership: Co-owning or jointly purchasing a property is useful even at the time of sale as the capital gains can be distributed between the co-owner and hence the tax liability.

Tax-saving Investments: Investing the capital gains from property sales in various tax-savings investments such as Equity-Linked Savings Schemes (ELSS), National Pension Schemes (NPS), or Public Provident Fund (PPF) can potentially reduce your tax liability.

Capital Gains Account Scheme: In cases where you are unable to invest the capital gains in any of the above ways before the due date for filing income tax returns, the government, as per the Capitals Gains Account Scheme, 1988  permits you to invest the full amount in a ‘capital gains account’ in an authorised bank. Tax exemption can be availed on a maximum amount of Rs. 10 crores. If the deposited amount is not used to reinvest in property then it is considered as STCG in the year in which the time limit lapsed.

It is advisable to seek guidance from financial experts to avail of the options provided by the Income Tax Department to save long term capital gains tax on property.

Frequently Asked Questions

1. Can I avoid short-term capital gains tax on property sales?

Answer: Sell the property after 24 months to avoid STCG tax.
 

2. What are the repercussions of not paying capital gains tax?

Answer: In case of negligence, the Income Tax office could impose significant penalties and take discretionary action based on the severity of the situation.