There are provisions under different sections of the Income-tax Act that can help you save on LTCG tax
Capital gains exemption will be reversed if you sell the new property within three years of purchase
Just like you pay tax on income earned, selling your capital assets too invites tax. The gains made from transferring capital assets such as house, stocks and gold is subject to capital gains tax and there are certain benefits you can avail to save tax on capital gains. While there is little relief when it comes to paying short-term capital gains (STCG) tax, there are provisions to save long-term capital gains (LTCG) tax. We list out three such provisions to help taxpayers save tax.
Property, whether land or house, is a capital asset. Gains from transferring of such assets attract capital gains tax. If you sell a house within 24 months, you have to pay an STCG tax on the gains as per your income-tax slab. After 24 months, you have to pay an LTCG tax, which is charged at 20% with indexation benefits. Section 54 gives you an exemption if you sell a property and buy another one. “The exemption under section 54 is available when the capital gains from property sale are reinvested into buying or constructing maximum two houses. Prior to Budget 2019, the exemption was limited to only one property," said Balwant Jain, a tax and investment expert. Post budget, it extended to two houses. However, the capital gains on the sale of house property must not exceed ₹2 crore in order to claim exemption for reinvesting in two properties. This benefit can be claimed only once in the lifetime.
To claim exemption on the entire LTCG amount, you have to reinvest the entire amount. “If full amount of LTCG is not reinvested, then pro rata relief is available," said Ashok Shah, partner, NA Shah Associates LLP, a chartered accountancy firm. Remember, your exemption will be reversed if you sell this new property within three years of purchase and capital gains from sale of the new property will be taxed as short-term capital gains. The new properties must be purchased either one year before the sale or two years after the sale of the property. Or the new residential properties must be constructed within three years of sale of the property. If you are not able to use the capital gains to buy or construct new houses before the date of furnishing of the return of income, you should deposit the amount in capital gains account scheme (CGAS); else the gains become taxable. Even if you have taken a home loan to buy the new property, capital gains exemption is valid under section 54 and also if you used it to repay the home loan.
Section 54 EC
This is a section you can use if you want to save LTCG from sale of property, and are not interested in redeploying the gains in real estate. “Section 54EC allows exemption of LTCG on sale of land and building if capital gain amount is invested in certain specified bonds. The exemption is available for both residential as well as non-residential property," said Shah. Specified bonds here mean, 54EC bonds issued by National Highway Authority of India, Rural Electrification Corporation, and the like. You get six months to invest in these bonds. “The maximum amount permitted is ₹50 lakh and now lock-in is five years instead of three. The rate isn’t attractive; if possible, you might as well buy a property instead of the bonds," said Mrin Agarwal, financial educator, founder director, Finsafe India Pvt. Ltd and co-founder, Womantra. The interest rate on these bonds is 5.75% and is taxable. Post Budget 2018, section 54EC has been restricted to gains from real estate only.
But what if you have capital gains arising from assets such as gold, stocks or even mutual funds? Even LTCG from assets other than residential property can be saved under section 54F if you decide to use the gains to buy residential property, subject to certain conditions. “Unlike section 54 and section 54 EC, you must invest the entire sale consideration and not just the capital gains to buy or construct a new residential property to claim this exemption," said Jain. In case you are not able to invest the entire amount, the exemption is allowed proportionately. Let’s say you transfer gold worth ₹20 lakh, which was purchased by you for ₹10 lakh five years ago. To avoid tax on LTCG of ₹10 lakh ( ₹20 lakh minus ₹10 lakh), you need to reinvest entire ₹20 lakh. In case you invest just 50% of the sale receipts, only 50% of the LTCG amount, i.e., ₹5 lakh will be tax exempt, and remaining ₹5 lakh will attract tax.
Also, to avail the benefit, “you should not own more than one house on the date of transfer, other than the one bought for claiming exemption under this section," said Jain. Just like section 54, new property should be purchased either one year before or within two years after the date of transfer or new property should be constructed within three years from the date of transfer. Remember, the exemption can be taken back if this new property is sold within three years of its purchase.
Things to remember
Can one use more than one section to pay lesser tax? Shah said that it is possible to claim deduction under both section 54 and 54EC by adding the investment made in new property and in specified bonds. As far as using simultaneous exemption under Section 54 and 54F, by investing in the same house goes, Jain said, “If all conditions are fulfilled, assessee can claim exemption under section 54 and 54F for investment in the same house."
So calculate the LTCG from different capital assets and take advantage of the tax benefits. Don’t ignore the rules related to specified time to reinvest, lock-in period and other provisions while reinvesting.