HELLO HOME, GOODBYE TAX

Selling your property can be taxing. However, you can now skirt the Capital Gain Tax (CGT) and profit from your property decision.
Here’s how...

With the festive season having commenced for the sector, realty transactions are taking place at a brisk pace. Hence, if you are looking to buy another apartment by selling your existing property, bear in mind: you will have to pay the Capital Gain Tax (CGT) on it as well. After all, every property transaction is scrutinised by the tax department.

WHAT IS CAPITAL GAIN?

Capital gain is of two types: Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG).

So, if you have bought property and you sell it in less than two years (24 months) of the purchase date, your STCG is calculated by deducting the cost of acquisition, including the money spent on renovating the property, and the transfer cost (from the sale price). “STCG is taxed as per your normal income tax slab of the relevant year of sale,” informs Nagesh Sharma, founder, Mera Loan Doctor.

LTCG is calculated when you hold the property for more than two years and then sell it. It is taxable at 20 per cent of the gains earned from the sale. Here, while the calculation is the same as that for short-term gain, the cost of acquisition and improvement is adjusted for inflation. This is called indexation.

TAXATION PROCESS:

“Taxation on gains is computed after indexation of the property price at the time of purchase. Indexation is a method for adjusting for inflation and hence, increases the tax value of the property each year. Once the index value of the property is arrived at, then the gains on sale above this value is subject to tax,” shares Amit Goenka, MD and CEO, Nisus Finance Services Co Pvt Ltd.

GIFTED OR INHERITED?

Remember, even if you have not bought property, but have inherited or received property as a gift, you are still liable for taxation. Here, capital gains will be computed on the basis of the cost to the previous owner, and indexed to the year of purchase.

STAY INVESTED:

Goenka suggests, “As per section 54 of the Income Tax Act, any person who has to sell off old property and buy or build a new property of equal or greater value, is exempt from paying the CGT. Also as per section 54F, if a person sells a non-residential land to buy a residential one, then the CGT is also exempted. This relief can be obtained, even if the new house was bought before selling the current house. It is imperative to hold on to the new property for at least three years, else it will attract taxes with penalties.” So, if you have been eyeing a bigger house, go for it!

AVOID CAPITAL GAIN:

THERE ARE OPTIONS TO REDUCE THE BURDEN OF TAXATION ON YOUR PROPERTY SALE. NAGESH SHARMA SHARES A FEW TIPS:
Option 1: Within three years from the date of sale of your property, purchase another house in India or construct another house. If you wish to upgrade to a better or bigger house, this option suits you well. This way you can not only save the tax, but also fulfill your desire of moving to a bigger or better home;
Option 2: Invest the capital gain amount in certain eligible government bonds, which have a mandatory lock-in period of five years. The interest earned through this is around five per cent; however, the maximum amount you can invest here is only Rs 50 lakh;
Option 3: This is not tax-saving, but could be a profitable option if invested in the open market after paying the CGT. This option does come with some sort of risks, but if done precisely, you can earn much more than what you might save towards paying tax. You can utilise the gain funds by either investing in the capital market, which can provide not less than 15 per cent return in long-term, or invest the same in commercial property, which can fetch around eight-ten per cent return with a possibility of capital appreciation. These two options of investing in either the capital market or in commercial property can recover the gain tax paid initially and eventually result into a profitable option.

HOW IT WORKS:

PICTURE THIS: IF RS 50 LAKH IS THE CAPITAL GAIN AMOUNT AND YOU WORK ON THE THREE OPTIONS ( REFER TO THE YELLOW BOX), HERE’S HOW IT IS BENEFICIAL TO YOU:
OPTION 1: By purchasing another house, you can save Rs 10 lakh;
Option 2: This option can save you Rs 10 lakh and earn you approx. Rs 15 lakh in five years by investing in certain eligible government bonds if the five-year lock-in period is taken into consideration;
Option 3: This option will have an outflow of Rs 10 lakh tax initially, but the remaining amount of Rs 40 lakh (i.e. capital gain amount of Rs 50 lakh less Rs 10 lakh CGT) is invested in the capital market, which brings approx. 15 per cent return average per year in five years. Hence, the corpus can become around Rs 70 lakh, which is more than what you made in option 2. Also, if this Rs 40 lakh is invested in purchase of commercial property, which brings in an approx. return of eight per cent post tax, you can earn approx. Rs 16 lakh in five years with a capital appreciation of approx. 20 per cent. In this case, this option can get you a total corpus value of Rs 64 lakh (i.e. Rs 16 lakh rental return + Rs 8 lakh property appreciation + Rs 40 lakh initial value).

Source: pune property times.