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Exemptions in capital gains tax while investing in residential property
January, 05th 2008
With surplus cash in hand, it is not uncommon for many salaried individuals and businessmen to invest in residential property. They dispose it off when the value of the property appreciates significantly. These transactions entail short-term or long-term capital gains tax on the profits made.


If the house owned by an individual is sold within 36 months of purchase, short-term capital gains tax is applicable. When computing shortterm capital gains tax, the gains are added to the total taxable income of the individual. The gain in this case is the difference between the cost of purchase and the sale value of the asset. It is then taxed at the relevant tax slabs.


If the house owned by an individual is held for a minimum of 36 months from date of purchase, long-term capital gains tax is applicable. Longterm capital gains are taxed at a flat rate of 20% irrespective of your income slab.

However, tax benefits are available under Section 54 of the IT Act. This tax can be avoided by re-investing the profits 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 if you construct a residential property on your own within a period of three years after the sale. In case of capital gains tax, you must be aware that only the profits earned from the sale proceeds need to be re-invested . The profits can be reinvested in a new residential property. You can still borrow money for the construction/purchase of the 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 return 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.


Vignesh purchased a house in the year 1992 for Rs 15 lakhs. In the year 2000, He spent Rs 5 lakhs on home improvement. The property was sold off in the year 2006 for Rs 60 lakhs. He incurred Rs 2 lakhs expenditure as transaction fees. Here's how his tax outflow towards capital gains on sale of the house is arrived at.

Long-term capital gains is computed by deducting from the full value of the consideration, the expenditure incurred in connection with the transfer, the indexed cost of acquisition, and the indexed cost of improvement.
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