How to save income tax on sale of house property

Have you sold your house property? Are you worried Income tax has to be paid on Capital gains? Do you know that there is legal way and you will not be required to pay income tax on sale of house property? Read on and save income tax on Capital gain on sale of house property. We will help you save capital gain through effective Tax planning on capital gains.

Understanding Capital Gain

Short term Capital Gain | Long Term Capital Gain | House Property |

How to calculate Capital Gains

Income Tax on Short Term Capital Gain | Income Tax on Long Term Capital Gain | CII | Cost Inflation Index | TDS on immovable property

How to save Income tax on Capital Gain

Construct new House | Purchase new house | Capital Gain Accounts Scheme | 54EC Bonds – NHAI Bonds or RECL Bonds | Difference between 54EC bonds and Capital Gain account Scheme

Income tax on Gain on sale of house property, will be either term as long term gain or short term gain.

Que: What is long term capital gain and short term capital gain?

When investments are held for more than 36 months, such gains are termed as Long Term Capital Gain (LTCG). However, for shares, mutual funds, listed bonds & debentures, zero coupon bonds, the period is 12 months.

When investments held for less than 36 months, such gains are termed as Short Term Capital Gain (STCG). However, for shares, mutual funds, listed bonds & debentures, zero coupon bonds, the period is 12 months. (For treatment of capital gain on shares visit here )

Que: What is the income tax rate payable on sale of house property?

Tax on Sale of house property or any capital asset is determined on basis on nature of sale.
Long term capital gain : If sale is long term capital gain (LTCG) Income tax rate payable is 20% .
Short term capital gain: If sale is Short term capital gain (STCG) Income tax rate payable is as per income tax slab applicable to your total income. Find out the latest income tax slab for financial year.

Que: Is any TDS required to be deducted on sale or purchase of property?

Yes: from 01.06.2013, if property value exceed Rs 50lac then in that case it is liability of buyer to deduct TDS @ 1% and deposit with the government.

Visit here : How to Pay TDS on Sale of property

Que:
How to calculate gain on sale of capital assets?

Capital gain on sale of Capital asset / or house property is calculated by deducting
Sales proceeds – transfer expenses
Less: Cost of Acquisition + Cost of Improvement.
Resulting amount is either STCG/ LTCG

Lets take an example of sale of House property:

Mr India sell a Property For Rs 10 lakh ( transfer charges Rs 20, 000)
He has purchased this property for Rs 2.5 lakhs inclusive of Stamp charges.
Investment made in section 54 ie purchased new house property in 3 years of sale –Rs 25 lakhs

Computation of Short Term Capital Gain			Computation of Long Term Capital Gain
Full consideration	100.00		Full consideration	100.00
Less: Expenses on Transfer	(2.00)		Less: Expenses on Transfer	(2.00)
Net Consideration	98.00		Net Consideration	98.00
Less: Cost of Acquisition	(2.50)		Less: Indexed Cost of Acquisition	(50.00)
Less: Cost of Improvement	0.00		Less: Indexed Cost of Improvement	0.00
STCG	95.50		LTCG	48.00
Less: Exemption u/s 54B/D/G	0.00		Less: Exemption u/s 54 to 54GB	(25.00)
Taxable STCG	95.50		Taxable LTCG	23.00
Income Tax on STCG @ 30% ( as per applicable tax slab)	28.65		Income Tax on LTCG @ 20%	4.60

Que: How to calculate Indexed cost of Acquisition?

Cost of Acquisition * CII for year of Sale
CII for Year of Purchase

(CII) means
Cost Inflation Index of previous years

Income tax saving tip : If you sold House property for longer period ie more than 36 month, your income tax liability is minimum.
You get Indexation benefit and income tax can be further saved by investing net proceeds/ Capital gain in section 54.

In short, sell your property only after 36 months.

Que: I have sold property in 2013, What is cost inflation index for 2013 ?

Cost Inflation index for 2013 is 939.

Cost inflation index for last 32 years as released by CBDT is given below for reference.

Year	CII			Year	CII
1981-82	100			1982-83	109
1983-84	116			1984-85	125
1985-86	133			1986-87	140
1987-88	150			1988-89	161
1989-90	172			1990-91	182
1991-92	199			1992-93	223
1993-94	244			1994-95	259
1995-96	281			1996-97	305
1997-98	331			1998-99	351
1999-00	389			2000-01	406
2001-02	426			2002-03	447
2003-04	463			2004-05	480
2005-06	497			2006-07	519
2007-08	551			2008-09	582
2009-10	632			2010-11	711
2011-12	785			2012-13	852
2013-14	939			2014-15	1024
				2015-16	1081

Que:
How can I Save Income tax on long term capital gain?

You can save income tax on capital gain by opting for any of these option.
Option 1:
Purchase a new house u/s Section 54 to save income tax on capital gain
Option 2:
Investment of capital gain in certain capital bonds under section 54EC [Section 54EC]

Option 1: Purchase a new home u/s Section 54 to save income tax on long Term capital gain of house property.

Eligible assesses. Benefit is available only to Individual & HUF

Conditions to be fulfilled
• Benefit is available only if sale is long-term capital gain.
• There should be a transfer of residential house (buildings or lands appurtenant thereto)
• It must be Income from such house should be chargeable under the head Income from house property
• A new residential house should be

• 
  purchased within 1 year before or 2 years after the date of transfer (or)
• 
  constructed within a period of 3 years after the date of transfer.

Que: How much capital gain is Exempt from Income tax?

If cost of new residential house >= Long term Capital gains , entire capital gains is exempt.
If cost of new residential house < Long term Capital gains,, capital gains to the extent of cost of new residential house is only exempt.

Que: What if new asset so purchased is sold before 3 years?

If the new asset is transferred before 3 years from the date of its acquisition, then cost of the asset will be reduced by capital gains exempted earlier for computing short-term capital gains.

Que: I am not able to decide new property to purchase, What can I Do?

The amount not utilized before the due date of filing return ( July 31) shall be kept in
Capital gain account scheme (CGAS) of the nationalized bank.
The amount should be utilized within the prescribed time i.e within 3 years from the date of transfer.
The amount not utilized within the prescribed time shall be treated as LTCG of the Previous Year in which the prescribed period expires.

For instance, let’s say, you sold a property in April 2013. The capital gain made should be used to either buy a house by April 2015 or construct a house by 2016. Until then, you can deposit the money in a CGAS account before the date of filing returns, which in this case was be July 31 2014, to save tax.
If you do not acquire the new property till April 2015, the LTCG would be taxable in the fiscal year 2015-16.

Que: How many types of CGAS accounts are there?

There are two types of accounts in the CGAS provision.
The first account is like a savings deposit account (also called as Account ‘A’) . Withdrawals may be made from the account from time to time subject to other conditions of the scheme. This account is suitable for people who are planning to construct a house over a period of time. The amount withdrawn should be used for the purpose of purchase or construction of a house. It should be used for the purpose within 60 days of the withdrawal. Any unused amount should be deposited back in the same account.

The second account is like a term deposit (also called as Account ‘B’) which is payable after a fixed period of time. The deposits may be made in one lump sum or in installments at any time. The amount should be deposited before the due date for filing income tax returns. The amount can be used in accordance with any scheme the central government may frame on this behalf.

Que: Is Interest earned from CGAS income tax free?

Reply: No, Interest earned from CGAS is not tax free. Interest earned has to be added in your total income for previous year for which you have earned interest income. Interest earned will be taxable as per income tax Slab

Option 2: Investment of capital gain in certain capital bonds [Section 54EC]

Eligible assesses. Benefit is available to any assesses

Conditions to be fulfilled for section 54EC

• There should be transfer of a long-term capital asset.
• Such asset can also be a depreciable asset held for more than 36 months.
• The capital gains arising from such transfer should be invested in a long-term specified asset within 6 months from the date of transfer.
• Long-term specified asset means specified bonds, redeemable after 3 years, issued by
  the National Highways Authority of India (NHAI) or
  the Rural Electrification Corporation Limited (RECL).
• The assessee should not transfer or convert or avail loan or advance on the security of such bonds for a period of 3 years from the date of acquisition of such bonds.
• The investment made in specified bonds should not exceed Rs 50 Lacs.

Que: Will I get full income tax exemption if I invest in these Capital Gain bonds?

Capital gains or amount invested in specified bonds (subject to maximum limit of Rs 50 Lacs), whichever is lower.

Que: What is the Rate of return of these 54EC bonds?

Generally rate of return is  6%. Capital Gain bonds are issued in last quarter of year. The bond is available for three years and can be redeemed only after three years

Que :What if 54EC Bonds so purchased is sold before 3 years?

In case of transfer or conversion of 54EC bonds or availing loan or advance on security of Capital Gain bonds before the expiry of 3 years, the capital gain exempted earlier shall be taxed as long-term capital gain in the year of violation of condition.

Que:I have made capital gain of Rs 1 crore in dec . This mean I can only save tax to the tune of Rs 50 lakh from bonds?

If you sell the house between October and March, you come in the six months limit between two fiscal years. In that case, you can invest in Capital Gain bonds Rs. 1 crore in total over two financial years and get the tax benefit.

Que: I have made gain of Rs 15 lac on sale of property of Rs 25 lac. Please advice if I need to invest full Rs 25 lac or just Rs 15 lac ie capital gain amount?

Reply: You need to invest Rs 15 lac ie Capital gain amount in 54EC capital gain Bonds or Capital Gain Account scheme.

Que:
What is Difference between 54EC bonds and Capital Gain account Scheme?

Reply: Below chart will help in identifying the difference between 54EC bonds and Capital Gain account Scheme

	Capital Gain Account Scheme	54EC Bonds
Benefit Available to	Individual and HUF only	Individual and HUF, Companies, Partnership firms, Corporations
Time limit for investment	Amount of capital gain need to be invested before filing return	Amount of capital gain need to be invested within 6 months from sale
Maximum Amount that can be invested	Rs 100 crore in a year	Rs 50 Lacs in a year
Type of capital gain for which this is allowed	You can invest in CGAS only in case of sale of House Property	Investment can be made in 54EC if there is capital gain due to sale of house property, Shares, or any other commercial property

Que : Where can Capital Gain Account scheme opened?

Reply: Capital Gain Account scheme ( CGAS), to save income tax on sale of capital gain can be opened with all Nationalised banks. Recently RBI has allowed private banks Like IDBI

Que: Which is better for investment in 54EC bonds- REC bonds or NHAI bonds?

Ans: Both bonds – viz Rural Electrification Bonds ( REC bonds) and National Highway Authority bonds (NHAI Bonds) have AAA CRISIL rating . Difference between NHAI and REC bonds can be understood from this table:

Bond	RECL	NHAI
Coupon/Interest rate/Yield	6%	6%
Rating	AAA / Stable (CRISIL)	AAA / Stable (CRISIL)
Tax Status	Tax Status	Taxable
Tax Benefit	SEC 54 EC	SEC 54 EC
Minimum (Rs.)	10,000	10,000
Maximum (Rs.)	50 Lakhs in a Financial Year across RECL & NHAI	50 Lakhs in a Financial Year across RECL & NHAI
Tenor	3 Years	3 Years
Interest Date	30th June	1st April
Put/Call/Premature Encashment	Bullet repayment at the time of Maturity	Bullet repayment at the time of Maturity
Mode Of Interest	Annual	Annual