Capital Gain Tax on Sale of Property

All about capital gains on sale of property and how to save on taxes

Key Takeaways

When you sell property, the profits earned are known as capital gains.
Per the Income Tax Act, 1961, you have to pay a capital gains tax on sale of property.
Capital gains are classified as short-term or long-term capital gains.
The law also affords exemption from long term capital gains if you meet the required specific criteria.
You can reduce the payable capital gains tax by investing in specific schemes and bonds.

Selling property is a complicated and lengthy affair. As the seller, you must adhere to several laws and regulations. In India, the tax implications following the sale of property are governed under the Income Tax Act, 1961. To learn more about capital gains on sale of property continue reading.

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What is the Capital Gains Tax on Sale of Property?

The payment received on selling property in India is considered a profit or capital gains on sale of property. The tax implication depends on when you sell the property. For instance, if you sell your land, house, or property within 36 months of acquiring it, the profits are considered short-term capital gains (STCG). For property sold after 36 months, the gains are deemed as long-term capital gains (LTCG). The LTCG and STCG tax treatment may depend on your tax slabs or gains acquired.

Capital gains on property sales are calculated by subtracting the cost of acquiring (repairing/improving) the asset from the sale value of the same. The amount determined can be classified as either short- or long-term capital gains.

How to Save Capital Gains Tax on Property?

You can enjoy LTCG tax exemptions under Section 54 of the Income Tax Act, 1961. You should be an individual seller or a member of a Hindu Undivided Family selling the property while fulfilling the following conditions:

You must use the capital gains to purchase or construct another house.
You must purchase the new house one year prior to or two years after selling the old house.
You must construct the new house within a holding period of 3 years after selling the old house.
You must purchase or construct only one additional house or property.
You must purchase or develop the property within the national borders of India.
You must not sell the new house for 3 years after taking possession.

If the price of the new property is less than the sale amount, then the exemption applies proportionately. You can use the remaining money to re-invest according to Section 54 EC within 6 months.

Things to Remember

You can avoid paying tax, especially if you cannot construct a new residential house but plan to, by applying the profit amount from a property sale in any public sector bank under a Capital Gains Account Scheme. Such a scheme allows you more time to begin the construction of your new house. You can also invest the profits earned in specified financial assets after selling property, which assists with saving tax under Section 54EC. To do so, you must invest in capital gains bonds within 6 months of property transfer.

Final Note

Knowing about the capital gain tax on property and tax-saving methods can prove incredibly beneficial. You can save tax by redirecting your gains into a host of investment options from the comfort of your home. Use DBS Bank's internet banking and mobile banking platforms to find suitable investment options.

Download digibank to open bank account online and begin your journey to making successful investments.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.