Many people, especiallythose who do not file their income tax returns, are not aware that they have to pay tax in respect of profits made on the sale of a residential house. In certain circumstances, you can save these taxes. Let us discuss.
Holding period basis for tax liability
If the house is sold after 24 months’ holding, the profits are treated as long-term capital gains. Long-term capital gains are computed by deducting the cost of the house from its net sale price. One has to pay tax at a flat rate of 12.50% on the capital gains so computed. If you are a resident individual or HUF, you have the option to either pay tax @ 12.50% on plain long-term capital gains or @ 20% on indexed long-term capital gains for a residential house bought before 23rd July 2024.
This tax rate on long-term capital gains is applicable irrespective of your tax slab. In case you do not have any other income or your other income is below the taxable limit, and you are a resident for tax purposes, your taxable long-term capital gains will be reduced by the amount by which your other income falls short of the basic exemption limit applicable to you. Please note that the deductions under Chapter VIA, like those available under Section 80C, 80D, 80G, etc., are not available against the long-term capital gains.
In case the house is sold within 24 months, the profits are treated as short-term capital gains and are taxed at your slab rate. There is no option to save tax on such profits. You will have to pay tax if your taxable income, including these short-term gains gain is more than 2.50 lakhs if you opt for the old tax regime.
For those over 60 years but below 80, the exemption limit is 3 lakhs, and for those over 80 years, there is no tax liability if such aggregate total does not exceed five lakhs. The amount of taxable income is computed after deducting various deductions like payment for life insurance, mediclaim, PPF, or bank interest income, etc. If you opt for the new tax regime, the basic exemption limit applicable is Rs. 4 lakhs, irrespective of your age.
First option to save tax – Buy another residential house
You can claim exemption in respect of long-term capital gains on the sale of a residential house if you invest the long-term capital gains to purchase a ready-to-move-in residential house in India within two years from the date of sale of the house. If you have already bought a residential house within one year before the sale of the residential house, the exemption can still be claimed. If you opt for the self-construction of the house or book and under construction house, the construction needs to be completed within three years from the date of sale of the residential house.
Though this exemption from the sale of one residential house is available for investment in one residential house in India but the income tax laws give you once in a lifetime opportunity to invest the long-term capital gains on the sale of a residential house, in two houses, provided the amount of long-term capital gain does not exceed two crore rupees.
You have to utilise the amount of taxable long-term capital gains for buying the house or for paying the developer before the due date of filing your Income Tax Return. In case you are not able to do so, the unused amount has to be deposited with a bank under the “Capital Gains Account Scheme”. The money so deposited has to be used for the same purpose within the prescribed time limit, failing which the unutilized amount in the Capital Gains Account becomes taxable in the year in which the period of three years gets over.
For claiming this exemption, the brokerage, stamp duty, registration charges and transfer charges, etc., paid are included in the cost of the new house and accordingly eligible for exemption with the original cost for purchase or construction of the new property. The house property so bought cannot be transferred within 36 months, failing which the exemption claimed earlier will be reversed in the year in which you transfer the new house.
Purchase of specified bonds
The second option to save tax on long-term capital gains on the sale of a residential house is by investing the capital gains in bonds of some specified financial institutions like National Highway Authority, Rural Electrification Corporation, Railway Finance Corporation, Power Finance Corporation, etc., within six months from the date of sale.
The bonds have a uniform tenure of five years, during which the bonds can be redeemed or mortgaged to avail any facility, failing which the exemption gets reversed. These bonds earn you interest at 5.25% annually. The interest on these bonds is fully taxable, but the maturity proceeds come tax-free.
One important thing one should know is that you cannot invest more than 50 lakhs in these bonds in a year, as well as in respect of capital gains transactions for one year. Please note there are no restrictions on a taxpayer claiming exemption under both options in respect of the sale of the same house.
It may be noted that investment in both cases has to be made even if you have not received the full sale consideration for the residential house sold.
Balwant Jain is a tax and investment expert and can be reached at *********@***il.com“>ja*********@***il.com and @jainbalwant his X handle.
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