With the boom in the economy witnessed over the past five years, many salaried individuals and businessmen are left with surplus cash. It is not uncommon for people to invest in properties and to dispose them off when the value appreciates significantly. One has to pay short-term or long-term capital gains tax on the profits made on the sale of a house, depending on how long the property was owned before the sale. A house refers to a residential property and does not include commercial property and plots of land.
Short-term capital gains tax
If the property is owned by an individual and is sold within 36 months of purchase, short-term capital gains tax of 20 percent is applicable on the profits earned from the sale. There are no tax benefits available as per current income tax regulations to save on short-terms capital gains tax.
Long-term capital gains tax
If the property is owned by an individual and is held for a minimum of 36 months from date of purchase, long-term capital gains tax of 10 percent is applicable on the profits earned from the sale. However, tax benefits are available under Section 54 of the IT Act. This tax can be avoided by re-investing in another residential property if either of these conditions are satisfied - a fully constructed residential property is purchased within a period of one year before the sale or two years after the sale, or, a residential property on is constructed within a period of three years after the sale
These are certain interesting aspects of capital gains taxation that investors must be aware of:
Only the profits earned from the sale proceeds need to be re-invested
The profits can be re-invested in a maximum of two new house properties
You can still borrow money for the construction/purchase of a new property and use the sale proceeds of the old property for other purposes
Long-term capital gains on sale of a house can be deposited under a Capital Gains Scheme of any authorised bank before the due date for filing of returns of income. This may not be relevant for sellers who have already invested the entire capital gains in another house, subject to conditions.
The amount deposited here is considered to have been used for the purchase or construction of the new house. If the amount you have deposited is not used for buying a new house within a period of three years, the amount will be treated as long-term capital gains of the previous year.
Section 54 provides exemption on long-term capital gains arising on sale of residential property and investments of such capital gains in another residential property. The law envisages a time limit within which the investments should be made.
That is, two years for purchase, and three years for construction. But if after the sale of the property, you cannot find another property of your choice, the amount of capital gains should be kept in any authorised bank under a Capital Gains Accounts Scheme till investment. Plan properly in advance and take advantage of the capital gains exemptions available under Section 54 in order to avoid payment of long-term capital gains tax.