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Implications of Income Tax on Sale of Property

Gains on sale of property

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.

Tax on sale of property

Selling Property

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.

Avoiding Taxes

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.

Understanding TDS

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.

Annalakshmi Ekambaram
Annalakshmi Ekambaram
Annalakshmi is a content writer at H&R Block India. She enjoys writing about Income Taxes in a simplified manner so that everybody can easily understand it.

14 Comments

  1. Rohini says:

    Hello Annalakshmi. Thank you for mentioning all types of possible taxes. Understanding TDS is a really important if you really want to save your money. Thank you for sharing amazing views.

  2. subhash macha says:

    what will be the tax liability on Gifted open land property ( held more than five years), from parent

    • Sony Pandey says:

      There will be no tax liability on the gifted open land property, as it has been gifted by a parent. Gift received from relatives are not subject to income tax in your hands.

  3. Nisha Patel says:

    I don’t know about the types of taxes in detail, but from this post I learned about all the details of property tax in India. So, thank you for this kind of information. I hope you will post more details in your next post as soon as possible.

  4. Pravin Lonkar says:

    HI Annalakshmi your post, put in simple words will help the common man tremendously. i just want to clear one thing I.e if some one buys a house now and sells it after one year, but he/she again buys another house bigger/ smaller than previous one within 2 years of sale , then what happens.As their may be no capital gains or profits as, one buys with the previously tax paid money another house.

  5. Chandru Badrinarayanan says:

    Hi Annalakshmi, this is a well written note & I found it useful. Can you also clarify if there is a different tax implication (after the 2018-19 budget provisions) on sale of a house property where someone holds more than 2 house / real estate propertied like non-agricultural land?

  6. Sunil says:

    My Father purchased a plot in 2008 in 3,75,000rs on my mother’s name.
    In 2014 he named it on My name.
    Suppose if I sell it for 18lac what is the tax implication on me or this LTCG should shown in my father’s ITR.
    If LTCG is taxable then After selling it if I purchase a house within 1year should my Father name is also necessary to add as joint owner.

  7. Shantanu says:

    Really informative post.
    My Query: If I sell joint property owned by me (first owner) & my spouse and then buy one within 2 years in the name of my spouse (first owner) & myself (joint).
    Then what will be tax implications as the onwner sequence is changed.

  8. Yogendra Sharma says:

    Hi Annalakshmi,
    If I have made loss from property selling then can I claim rebate in income tax.

  9. Anil says:

    Hi Laxmi

    I am purchasing flat which is more than 10years old for 18 lacs.
    Seller has purchased 10 years back @ 6 lacs.

    Present govt municipal value is 12.6 lacs.

    Home loan approved amount is 18lacs
    Cheque will come on seller name 18lacs.

    My question is does seller need to pay profit gain tax for resale property? Let me know how to avoid any kind of tax to be paid by seller…as he is worried.

    One hint::: seller is going to buy another new property simultaneously from some other buyer.

  10. Saurav Saha says:

    Hi Annalalakshmi

    I wanted to clarify a few things. Our 2nd property (house) is within our joint family for more than 50 years. In the year 1997 we had made a deed of partition mentioning our own separte portions property area . We recently (2 weeks back) have been gifted a portion from our family members, which we want to sale(by next month) Can you please elaborate about the taxes that can be levied. Whether iys would STCG or LTCG?

  11. K NARAYANAN says:

    My daughter who is living in US for past 10 years. With the intention of coming back to India she purchased a flat in Bengaluru by remitting the money in dollars in PNB account here. The cost of the Flat was ₹.45 lakhs then Now her green card processing is going on there she now decided to sold the flat at a cost of ₹.54 lakhs and to purchase house there. She wanted to repatriate the sale proceeds to US. She has Indian PAN no. here. So far she has not filed any IT return.
    I need clarification on this.
    1. What are formalities to be followed to repatriate the sale proceeds to US
    2. What is the Tax liability.
    3. Any penalty to be imposed by IT Dept. for not filing the return all these years.
    4. Is it necessary to deposit in Capital Gain bond after selling the property here.
    5. Any other important things to be followed for repatriation of the sale proceeds in dollars.

    Kindly advice in this matter early.

    K Narayanan

  12. Vamsi says:

    My wife recently sold a flat which is almost 10 years old. The sale price is less than cost price and essentially we lost small amount due to this sale. I hope there will be no tax on this sale as there is loss. My wife is a house wife and do not have any income. She also never filed a return earlier. Now I would like to know how to report this sale in her ITR (believe she need to file ITR2)

    Please advice
    Vamsi

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