How To Avail Capital Gains Tax Exemption on Sale of a House Property

Buying and selling capital assets(Real Estate, House, shares, mutual fund units) attracts capital gains tax. This may vary according to the nature of the asset and the holding period.

Meaning of Capital Gain– Capital Gain arises out of the profit you derive from the sale of the capital asset. Only the profit you gained against the purchase price is capital gain.

In simpler words, the difference between the purchase price and selling price is calculated as Capital Gain.

Short-Term Capital Gains on sale of house property would be applied if the property is sold before 3 years from the date of purchase and Long-term capital gains would be applied if it is sold after 3 Years

Whereas, in capital assets like shares and mutual fund units- short-term capital gain tax arises when sold before 1 year in case of equity and 3 years in the case of debt funds. Long term capital gain tax arises when shares are sold after 1 year and if the profit is over and above 1 Lakh in a financial Year and in debt funds the capital gain is adjusted to 20% indexation benefit or 10% without indexation; whichever is applicable.

How Capital Gain Tax can be exempted on the sale of residential property

The individual can avail capital gain tax exemption under section 54 of the income tax act by investing the capital gain in another house within 2 years after date of the sale or 1 Year before the date of sale. i.e, the asset holder should purchase the house or construct a house within 3 years from the date of the sale of the old property.

But this capital gain exemption is subject to threshold limit of 2 crores. That means, the individual can’t claim exemption if the capital gain is above 2 crore.

What if you didn’t purchase another house within stipulated time but still want to avail capital gain exemption-

Another alternative to avail capital gain exemption is to “Invest in Capital Gain Bonds” offered by the banks. You can invest the entire capital gain in capital gain bond scheme or you can invest partial amount in bonds and invests the remaining amount in another house. It is at your own discretion.

What if the seller didn’t purchase another house or invest in the capital gain bonds

In this case, the seller has to pay capital gain tax adjusting with the inflation-cost index notified by the government from time-to-time.

Tax would be calculated on the consumer price inflation index on the purchase date and the consumer priced adjusted inflation index on the selling date. The difference between the purchase amount and sale amount would be adjusted to this both indices and tax would be payable.

If you are not familiar with the cpi index, consult a tax consultant/ chartered accountant and pay tax accordingly. But it would be beneficial to invest in another house property before 3 years from the date of sale and get exempt from capital gain tax or else simply invest the gain amount in capital gain bonds offered by the banks.

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