Here’s How to Save Long Term Capital Gains Tax on Real Estate

However, Income tax (IT) laws allow taxpayers to take advantage of exemption on capital gains made on sale of assets by reinvesting the proceeds in certain assets.

“If a taxpayer sells an asset and reinvests the proceeds in specified assets within the specified time frame, he can claim capital gains exemption. However, exemption is allowed only if the gains are long-term capital gains. (LTCG). “If the profit is short-term capital gain (STCG), no exemption will be allowed,” said Karan Batra, founder, CharteredClub.com.

Benefits of investing in residential property

Under section 54 of the Income Tax Act, an individual or HUF (Hindu Undivided Family) can use the capital gains booked from the sale of the property for the purchase or construction of any other residential property to obtain tax exemption on capital gains. Is. Only capital gains need to be reinvested, not the entire sale proceeds. In addition, taxpayers can invest capital gains in two house properties. Conditions that capital gains should not exceed 2 crore and taxpayers can exercise exemption on two properties only once.

There are additional conditions for availing exemption on capital gains under section 54. The capital gain must be invested in a residential property located in India and the new purchase must be made within one year or two years prior to the sale of the property whose capital gain is to be reinvested. If the capital gains are used to build the house, the construction must be completed within three years from the sale of the property. Also, the new property in which the capital gains have been invested should not be sold earlier than three years from the date of purchase, failing which the exemption claimed will be taxed in the year in which the new house property is sold .

The amount of capital gain that can be exempted from tax will be less than the amount of capital gain made on the sale of the property and profit invested in a new residential property.

For example, if the capital gain made on the sale of an asset is 50 lakhs and new property is bought 40 lakhs, 40 lakh will be exempted from tax. Taxpayer has to pay long term capital gains tax on the balance amount 10 lakhs.

investment specified bonds

Section 54EC allows exemption on capital gains made on the sale of any immovable property by investing in bonds specified by the government.

This exemption is available only on long-term capital gains made on the property and maximum 50 lakh can be claimed as exemption.

Bonds eligible for exemption are issued by Rural Electrification Corporation Limited, National Highways Authority of India, Power Finance Corporation Limited and Indian Railway Finance Corporation Limited.

To avail exemption under section 54EC, the taxpayer must invest the profit within six months of the sale of the asset. Note that these investments can be redeemed only after five years.

“If the investment in bonds is transferred or converted into money or if the assessee takes a loan or advance on the security at any time within a period of five years from the date of acquisition, exemption of capital gains under section 54EC shall be extended to the previous year.” shall be treated as long-term capital gain of Rs.