Since the beginning of time, man has been driven to conquer land and build his home on it. As we evolved, the homes became a great source of investment for his future and the future of his family. As we evolved more through time, the introduction of taxes caused chaos initially, until the system of taxes was established and general tax knowledge became prevalent in society. The purchase and sale of property can, similarly, have adverse tax implications if undertaken without proper knowledge.
A popular investment amongst many is the buying and selling of property, since the risk factor is low and returns are guaranteed. However, selling your property can end up costing you in taxes if you do not plan the sale of the property wisely. Any immovable property sold within two years of it’s purchase is treated as a short-term capital gain (STCG) and the profit from the sale is added to the income of the seller/owner and taxed at 30%. Moreover, the tax benefits adopted also become void and the claims u/s 80C also get reversed. Only the interest payment deduction is left alone.
However, if you make the sale after two years, then any income from the sale of the house is treated as a long term capital gain (LTCG) and is taxed at only 20%, after indexation. Additionally, LTCG offer exemptions that STCG’s don’t. When calculating taxes due, under LTCG exemptions, you can also deduct any costs incurred during ownership on improvements/ renovations done, thereby reducing your total liability.
If you want to avoid paying any tax on your gains, there are provisions that you can take advantage of. You can use the entire capital gain amount to buy another property within two years or you can also build a new house within three years from the sale of the initial property, provided the new property is purchased in the name of the seller or any of his/her close relative. If the new property is sold within three years, then as mentioned above it will attract STCG and be taxed at normal tax rates.
There is also the option of investing your capital gains, up to Rs 50 lakhs, in 54EC bonds (NHAI/REC) for a period of three years. Finally, you can also reduce your capital gain tax liability by offsetting it against long term losses from the sale of other assets. You can carry the losses forward for a period of eight years.
For any purchases of property over Rs 50 lakh, buyers must deduct TDS at 1% of the property value before paying the seller and deposit it to the government account. This payment is linked to the seller’s PAN and made by the buyer on behalf of the seller, which will be reflected in the seller’s Form 26AS. The seller can get a refund on the TDS deducted if the sale of the property was a loss for him/her or claiming Long Term Capital Gain exemptions using the ways mentioned above. The refund can be claimed by providing the capital gains details in his/her tax return or he/she can get a certificate from the assessing officer, so that no TDS is deducted. TDS provisions for non resident sellers differ and the buyer has to deduct the taxes at a higher rate, depending upon the nature of the gain (i.e. 30% in case of STCG and 20% in case of LTCG). Further TDS will be required to be deducted even if the sale consideration is less than Rs. 50 lakh.
As taxes evolve side by side with mankind, the acquiring of selling and property can be complex. So, if you are thinking of selling your property, let the experts at H&R Block India, help you to minimize tax implications and maximize tax savings when filing your tax returns.