Many property owners in India, particularly those who do not regularly file income tax returns, are often caught off-guard by the tax implications of selling a residential house. Profits from such sales are taxable, but the law provides specific avenues to save on this liability. Understanding the holding period and available exemptions is crucial for every homeowner.
Understanding Tax Liability Based on Holding Period
The tax you pay on the profit from selling your house depends primarily on how long you owned it. If you sell the property after holding it for more than 24 months, the profit is classified as a long-term capital gain (LTCG). For assets sold before 23rd July 2024, resident individuals and Hindu Undivided Families (HUFs) have a choice: pay tax at a flat rate of 12.5% on the basic gain, or opt for indexation and pay tax at 20% on the indexed gain. Indexation adjusts the purchase price for inflation, which can significantly reduce the taxable profit.
This special LTCG tax rate applies independently of your income tax slab. However, if your total income, including these gains, is below the basic exemption limit (₹2.5 lakh under the old regime for most, higher for seniors), the gains can be adjusted accordingly. It is important to note that common deductions under Sections 80C, 80D, etc., cannot be claimed against long-term capital gains.
If the house is sold within 24 months of purchase, the profit is treated as a short-term capital gain (STCG). This amount is simply added to your annual income and taxed at your applicable slab rate under the old or new tax regime. Under the new regime, the basic exemption limit is ₹4 lakh for all individuals.
Option 1: Reinvest in Another Residential Property
The most popular method to save tax is by reinvesting the capital gains into another residential house. Under Section 54 of the Income Tax Act, you can claim a full exemption if you use the long-term capital gains to purchase or construct a new residential property in India.
The investment must be made within specific timelines: purchase of a ready-to-move-in house must be completed within two years of the sale, or construction must be finished within three years. You can also buy a house one year before the sale. The amount must be utilized before the due date of filing your Income Tax Return for that year. Any unutilized amount must be deposited in a designated Capital Gains Account Scheme with a bank to still qualify for the exemption.
A significant, once-in-a-lifetime benefit allows you to invest gains from one house into two residential properties, provided the capital gain does not exceed ₹2 crore. Furthermore, costs like stamp duty and registration fees for the new property can be included in the investment amount. A key condition is that you cannot sell this new property within 36 months, or the exemption will be revoked.
Option 2: Invest in Specified Capital Gains Bonds
If you do not wish to buy another house, you can park your gains in bonds issued by specified institutions like the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). This option falls under Section 54EC.
The investment must be made within six months from the date of the property sale. These bonds have a lock-in period of five years and currently offer an annual interest rate of 5.25%, which is taxable. The maturity amount, however, is tax-free. There is an upper limit of ₹50 lakh that can be invested in these bonds in a financial year.
It is permissible to use a combination of both options for the gains from a single property sale. Also, the investment must be made from the capital gains amount even if the full sale consideration from the buyer is pending.
Navigating these rules can help homeowners legally minimize their tax outgo. For personalized guidance, consulting a tax expert like Balwant Jain is advisable.
