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How to save tax on selling a property in India? – Explained

According to income tax regulations, depending on the length of holding, any gains from the sale or transfer of a residential property are subject to capital gains tax.

According to Dr. Suresh Surana, the founder of RSM India, if you have owned a property for more than 24 months, the gains from selling it will be taxed as long-term capital gains at a rate of 20% under Section 112 of the Income Tax Act of 1961.

The house property would, however, be subject to short-term capital gains tax at the taxpayer’s applicable marginal slab rates if it were held for less than 24 months.

Section 54: Exemption for investment in residential property in India

“Section 54 of the Income Tax Act provides that an individual or HUF may claim tax exemption on long-term capital gains arising from a house property by way of investing the capital gains in one residential property in India,” says Dr Surana.

“For claiming the exemption, such new house property should be purchased within a period of 1 year before or 2 years after the date of transfer of old house or should be constructed within a period of 3 years from the date of transfer of the old house,” he adds.

This means that if you purchase a new residential property within two to three years of selling an older one, you may be eligible for a tax exemption. If you build a new home within three years of selling the old one, you can also apply for the exemption.

Taxpayers should be aware that this exemption can only be used for one residential property that was bought or built in India.

The taxpayer can, however, take advantage of a once-in-a-lifetime opportunity to purchase two residential properties within the aforementioned time frame if the long-term capital gain is up to Rs 2 crore.

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3-year commitment

After selling an older property and claiming an exemption for buying or building a new one, you have three years to sell the new property.

How much exemption can be claimed under Section 54?

As per the tax expert, the exemption under section 54 will be lower of the following:

  • Amount of capital gains arising on transfer of residential house; or
  • Amount invested in purchase/construction of new residential house property (including the amount deposited in Capital Gains Deposit Account Scheme)
  • With effect from FY 2023-24 i.e. AY 2024-25, the Finance Act 2023 has capped the limit of investment in new house property to Rs 10 crore for the purpose of claiming deduction u/s 54 of the IT Act.

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Section 54EC: Exemption for investment in certain specified bonds

As per Section 54EC of the Income Tax Act, an individual or HUF can claim tax exemption from long-term capital gains from house property by way of investing such gains in certain specified bonds within six months from the date of transfer of house property.

Investments in the following bonds are eligible for exemption from LTCG on house property under Section 54EC of the IT Act:

  • Rural Electrification Corporation Limited or REC bonds
  • Power Finance Corporation Limited or PFC bonds,
  • Indian Railway Finance Corporation Limited or IRFC bonds.
  • Investing in the National Highway Authority of India or NHAI bonds was also eligible for exemption. But this is no more a feasible option as such bonds are discontinued from 31st March 2023, says Dr Surana.

5-year lock-in

Any investment in the above bonds would be subjected to a lock-in period of 5 years for claiming LTCG exemption after selling a house.

“In case the taxpayer availing exemption u/s 54EC transfers or converts such bonds into money within 5 years from the date of its acquisition, the exempted capital gains would be subject to tax in the year of transfer/ conversion,” says Dr Surana.

How much exemption can be claimed under Section 54EC

Taxpayers can claim exemption up to the lower of the amount of capital gains or investment in specified bonds. The maximum investment amount is restricted to Rs 50 lakh.

Source: Financial Express

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