How to Save Capital Gain Tax With Tax Planning at H&R Block
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Save Tax on Capital Gain With Tax Planning at H&R Block India

Save Tax on Capital Gain

On a mildly chilly December morning, Darsh was sitting in his garden with his wife, Deepa, basking in the joy of the news his wife had just given him, that they were expecting a child. As, they spent a few quiet moments enjoying their morning tea, Deepa started thinking about the lack of space in their current home, which was not suitable for a baby. Deepa and Darsh started discussing plans of selling off a flat they had inherited a few years ago and purchasing a bigger home, one that would be able to accommodate the addition to their small family.

Tax on sale of property

While Deepa was thinking of what kind of house she would like, Darsh was thinking about the financial aspect of selling and purchasing a new home. So, as he sat there with this newspaper, pondering all the implications of buying a new home and how to save tax on capital gain on the sale of property. It was then he saw an ad for H&R Block India, an international tax company that also provided tax planning services.

A few days later, Darsh was sitting with a tax consultant at H&R Block India and he explained his situation and plans to Nilesh. Nilesh having years of experience as a tax expert at H&R Block was aware of the various tax implications on the sale of property and the capital gains taxes applicable.

Nilesh explained that as Darsh has been in possession of his current property for 4 years, the property will be classified as long term and will qualify for indexation benefit. He can also take advantage of the provision under section 54. Nilesh explained to Darsh that in order to avoid taxation on the profits arising from the sale of his inherited flat, it is best to invest the amount into a new property, which must be done within two years if he is buying a ready to move house and three years if he constructing a house property.

The time period would begin from the date of sale of the original house. However, till the amount is invested in the new property he could deposit the profits arising from the sale of the property into a Capital Gains Account Scheme (CGAS) to avoid being taxed in the relevant assessment year. The amount would need to be deposited in the CGAS account before the due date of filing the return (i.e. 31st July in his case). However, the interest earned on CGAS deposits would be taxable and TDS will be deducted. Furthermore, Darsh should only withdraw the funds from the account, when he was ready to purchase his new house, as the funds once withdrawn should be utilized within 60 days, else re-deposited into the account. If the funds are not utilized for investing in new property within three years or withdrawn otherwise, the amount so withdrawn will be considered as income of that year and be chargeable to tax.

Capital Gain on Sale of Property

Nilesh further explained that Darsh could also invest in Bonds as per Section 54EC. The investment in bonds would have to happen within 6 months from sale of property and the funds would be locked in for 5 years and the interest will be taxable. However, upon contemplation Darsh decided that this option would not suit him and it seemed that the best option would be to avail of the CGAS, which would allow him the time to properly construct their new home, as per the wishes of his wife. And as he had three years in which to complete construction of the house, with the option to withdraw funds as needed to pay for the construction, this would be the best option for him.

Darsh, after discussing his ideas with his wife, met with Nilesh once again and with the aid of his personal tax consultant set about setting his plans in motion. Darsh put his property up for sale and within 6 months it was sold. Nilesh directed Darsh at regular intervals to ensure the funds were properly setup in the CGAS and handled any tax related queries Darsh had. The diversity of knowledge relating to taxes Nilesh had and the help provided a relief to Darsh and Deepa. They decided that they would enlist the aid Nilesh for their tax preparation and filing needs as well, due to the positive experience they had at a crucial moment in their life.

Capital Gains on Sale of House Property

At the end of two years, Nilesh was invited to the newly constructed house of Darsh, Deepa and Kanchan, their newborn child, who was now 1.5 years old.

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CA Shreya Oturkar
CA Shreya Oturkar
Shreya is a tax advisor at H&R Block (India) with intensive experience in SME taxation and audit. She holds an advanced post graduate qualification in accounting and is highly skilled in financial analysis and reporting. Apart from her professional achievements, Shreya is a talented artist with a flair for free-hand sketching!