How to pay lesser tax while selling your house
Spreading the news, finding a buyer or seller, setting the price and ensuring complete paperwork are the customary tasks involved in selling a house. Well, that’s just the tip of the iceberg for the seller who needs to consider the tax outgo after the sale is completed. Whenever a property is sold in India, the seller makes a capital gain, which is taxed, or it can be reinvested in specific assets or schemes. Timing the sale is crucial as it determines the tax burden. In fact, capital gains tax may be charged even if the property is being redeveloped.
While most of us may be aware that selling a house attracts tax, the nitty-gritties are mostly unclear. It is important to note that the tax is charged not on the entire amount you receive from the buyer, but only on the gain (differential between your sale price and the initial purchase price, cost of renovation and the transfer costs). But if you sell your property within three years of purchase, the incremental gain is termed as short-term capital gain and will be taxed directly, as per your income tax slab. You can reduce your tax outgo only if you hold on to your property for at least three years, after which any gain from a sale is a long-term capital gain, which attracts a flat tax rate of 20%. Regular tax deductions (from section 80C and others) do not apply to capital gains, but other benefits are available.
This method basically relies on using the Cost Inflation Index released each year since 1 April 1981. Let’s say you purchased your property in 1994 (1994-95) for Rs.10 lakh and are now selling it (in 2014-15) for Rs.1 crore. Thus, the basic capital gain on this sale will be Rs.90 lakh, on which the tax charged will be Rs.18 lakh. However, if you apply indexation, your net gain shrinks drastically, and so does your outgo. In this example, applying indexation will reduce the capital gain to Rs.39 lakh, and the resultant tax outgo to just Rs.7.8 lakh.
In case the property you are selling has been inherited or gifted to you, the capital gain (and indexation) will be computed based on the acquisition cost of the original owner.
If you want to completely avoid paying tax, you will have to reinvest the capital gain amount. Here’s how.
Buy or build a house: You must purchase a new house from your capital gain proceeds, within two years of your selling your current property. If you like planning in advance, you could book a house a year before selling your current one, and set off all expenses that arise thence, against your capital gain. You can also build a house, but you must complete the construction within three years of the sale of the older property.
Capital Gains Account Scheme: If you want to bide your time and do not want to hasten into an investment, you can invest the capital gains in a special Capital Gains Account Scheme (CGAS), with your bank, which serves to inform the taxman that you do plan to invest in a property, but at a later date. Deposits under CGAS are eligible to exemption from capital gains tax, but there are some conditions:
• Such a deposit must be done before you file your income tax returns for the fiscal in which the sale has been completed.
• This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.
• Funds withdrawn have to be used within 60 days.
• You will have to pay tax arising on the interest paid.
Specified bonds: Another option, and one with some scope of returns, comes from specified bonds, such as bonds of the Rural Electrification Corp. Ltd and the National Highways Authority of India, within six months from the date of sale. Such bonds usually have a tenor of three years, and even pay a quarterly or half-yearly interest. Earlier, you could invest a maximum of Rs.50 lakh per financial year to reduce the capital gains tax, and if the six-month deadline extended into the next fiscal, you could invest another Rs.50 lakh over two succeeding financial years. However, this rule has changed, and will not be applicable from assessment year 2015-16. The exemption is now being restricted to Rs.50 lakh both in the year of transfer of the capital asset and in the subsequent year.
When you sell a house, you can make a capital gain but you may also bear the brunt of a capital loss, owing to adverse market conditions, or due to a distress sale. Such a loss, if it is short-term, can be set off against the capital gain from a short-term or long-term sale of any other asset such as gold or equity shares. However, a long-term capital loss cannot be set off against a short-term capital gain from any other asset.
It is also interesting to note that even when your building is being redeveloped, the resultant transfer of the property to the builder in the interim period is termed a sale, in the eyes of the income tax department. However, such a capital gain can be set off when you acquire the property back, in lieu of the extra cost you may have to bear. You can also ask the developer to provide extra space for such cost, thereby reducing the tax outgo.
You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo.
However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
Hence, plan wisely and carefully to reduce your tax outgo.
Binaifer Jehani is director, Crisil Research.
The story has been modified to reflect the correct tax law regarding specified bonds.