Many taxpayers are not aware of the provision of the income tax act on how to save the tax on the sale of residential property. They earn profits on the sale of residential property and pay the taxes. They can save the tax. I have brief the methods from which the taxpayers can save the tax.
Tax liability on the sale of house property
Long Term Capital Gain or Short Term Capital Gain
The profit comes from the sale of the property is called capital gain. When the property is sold after 24 months by holding then the profit will be called long term capital gain otherwise short term capital gain. Exemption from tax is allowed only from long term capital gain. Long term capital gain is computed by deducting the indexed cost of the house from its net sale price. Deductions under section 80C, 80D, 80G, etc. are not available in respect of long term capital gain.
Applicable Tax Rate
Long term capital gain is taxable at a flat rate of 20%+surcharge (applicable if net income exceeds Rs. 50 lakh) + health and education cess (4%). The amount of taxable income is computed after deducting various deductions like payment for life insurance, mediclaim, PPF or bank interest income, etc.
Exemption Limit
No exemption limit is provided in case of capital gain. However, in the case of a resident individual or HUF, the benefit of exemption limit is available, if taxable income minus long term capital gain is less than the exemption limit. The exemption limit for resident individual or HUF is Rs. 2, 50,000. For senior citizen (age 60 years or above but less than 80 years) the exemption limit is Rs. 3, 00,000. For super senior citizen (age 80 years or above) the exemption limit is Rs. 5, 00,000.
For Example: Mr. A (30 years) is a resident individual. For the assessment year 2020-21, he has the following incomes-
Long term capital gain Rs. 16, 00,000
Salary income Rs. 2, 00,000
Bank Interest (Fixed Deposit) Rs. 47, 000
Net Income Rs. 18, 47,000
In this case, the exemption limit available for Mr. A is Rs. 2, 50,000. Taxable income minus long term capital gain is Rs. 2, 47,000. It is less than the exemption limit. Consequently, from the long term capital gain, the following shall be deducted:
Exemption limit – (Net Income – Long term capital gain)
2, 50,000 – (18, 47,000 – 16, 00,000) = 3,000
Long term capital gain chargeable to tax will be Rs. 15, 97,000 (Rs. 16, 00,000 – Rs. 3,000).
Here are two methods of saving the tax on the sale of house property
First Method – Purchase another residential house (Sec. 54)
Assessee can avail this method of exemption by investing the capital gain amount in purchasing another residential house. For availing exemption, the house can be purchased within a period of one year before the transfer or within 2 years after the date of transfer. If the taxpayer invests the whole amount of capital gain in purchasing the house then the entire amount of capital gain is exempt from tax.
On the other hand, if the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gains and the cost of the new house is chargeable to tax as a capital gain.
For Example : Mr. A owns a residential house in Delhi since 1988. The house is sold by him on 25 May 2019 for Rs. 1, 25, 00,000. The cost of acquisition of the house is Rs. 4, 18,934. On 16 July 2020, he purchased a house of Rs. 62 lakh. Calculate the amount of capital gain chargeable to tax.
Solution: Calculation of the capital gain:
Assessment year 2020-21
| Sale proceeds | Rs. 1, 25, 00, 000 |
| Less: Indexed cost of acquisition (Rs. 4, 18,934*289/100) | Rs. 12, 10, 720 |
| Balance | Rs. 1, 12, 89,280 |
| Less: Exemption for purchasing a new house | Rs. 62, 00, 000 |
| Long term capital gain | Rs. 50,89,280 |
Exemption also available in case of house construction
Assessee can also claim the exemption on the construction of the house. Construction of the house should be completed within 3 years from the date of transfer. Construction may be commenced even before the transfer of the house. In the case of compulsory acquisition, the limit of 1 year, 2 years or 3 years is applicable from the date of receipt of compensation.
The house property so purchased or constructed has not been transferred within a period of 3 years from the date of purchase or construction.
Exemption available for one house only
This exemption is available only in respect of investment in one residential house in India. However, from the assessment year 2020-21, the assessee can invest in two houses and claim the exemption if the amount of capital gain does not exceed Rs. 2 cr. Assessee can exercise this option only once in a lifetime.
Cost of the new house
The cost of the new house shall include the amount of the brokerage, stamp duty, registration charges, and transfer charges and the same will be eligible for claiming exemption under section 54 of Income-tax act.
Capital gain deposit scheme
Assessee has to utilize the amount of taxable capital gain for buying a house or for construction before the due date of filing of the income tax return. If the assessee is not able to utilize the full amount of capital gain, the unused amount has to be deposited with a bank under the Capital Gains Accounts Scheme. The amount already utilized for purchase or construction of the new house together with the amount deposited in the bank shall be deemed to be the amount invested in a new house for the purpose of the exemption.
The assessee should be utilized the deposited amount for purchasing or construction of the new house within the time mentioned in the act. If the assessee fails to utilize the amount deposited in the bank within the time period, then such unused amount shall be treated as long term capital gain and taxable.
Consequences if the new house is transferred within 3 years
If the new house is transferred within a period of 3 years from the date of its purchase or construction, the amount of capital gains arising therefrom, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new house property.
Second Method- Investment in specified bonds (Sec. 54EC)
The second option to save tax on long term capital gain is investing the capital gains in specified bonds. These bonds should be issued by the National Highway Authority of India (NHAI), Rural Electrification Corporation Limited (REC), etc.
Investment in bonds should be done within 6 months from the date of transfer of the house property.
Tenure of the specified bonds
The bonds have a uniform tenure of five years. If the assessee transferred the bonds or converted into money or taken any loan against such bonds within 5 years from the date of their acquisition then the amount of capital gain arising from the house property which was not charged to tax will be deemed to be the income of the previous year in which bonds are transferred.
Amount of Exemption
Amount of exemption under section 54EC is lower of the following amounts:
-
- Amount of capital gains generated on transfer of house property
- Amount invested in specified bonds
Assess can invest a maximum of Rs. 50 lakh for any previous year in specified bonds. The cost of the specified bonds shall not be eligible for deduction under section 80C.
Treatment of interest on specified bonds
The interest received on these bonds is fully taxable in your hands but the maturity proceeds of the bonds are fully tax-free.
Both exemption simultaneously
Assessee can claim both exemptions in respect of the sale of the same house.