How to save tax on sale of a house property

If a land or a house property is held for 24 months or less, then the asset is treated as short term capital asset. The seller makes a short-term capital gain/loss by selling such a property. But if the land or the house property is held for more than 24 months than it is treated as a long-term capital asset. You can make a long-term capital gain/loss by selling a long-term capital asset.

There are other aspects of selling a house property which if given due consideration, could save your tax burden arising from the sale. In this article we will study the long term capital gains attracting tax liabilities

What should be avoided?

• Both the buyer and the seller must account for the transaction fully. If by any chance the deal is settled unlawfully to avoid tax, the registered value of the property will be low and in future it will prove detrimental. Any unaccounted channels might look lucrative but ultimately, they are of no use.
• Once the transaction takes place, it should be reflected in the returns of income. All the necessary details must be put before the tax authorities in a timely manner. If this is not done, it will complicate the matter and if you get caught, the tax authorities can take actions against you for hiding the facts.

Keep the following points in mind while selling the house property-

• All the state governments usually register value of any property at a certain level. When a property is sold at a lower price, the registration will be done at the minimum registration value for that area. The sub-registrar decides the value of the property and calculates the tax accordingly.
• The profit arising out of the transaction can be either a short term or a long-term capital gain.
• The exemptions under section 54 and 54FC shall be applicable.
• You should buy another property from the sale proceeds of the house property sold out or invest the money into specified bonds within the prescribed time. If you fail to do so then the balance should be deposited in the Capital Gains Account Scheme.
• When a house is bought but the project is getting delayed, the buyer is allowed to claim the exemptions under the Income Tax Act.

Those who sell their house properties are provided with two options: either they can buy another house property or invest the money in specific bonds.

Exemption under Section 54 from Long Term Capital Gains Tax

Use the entire long term capital gain proceeds on sale of a residential house to buy another house property. The following conditions must be met-

1.The new house is bought one year before the transfer of the first house or within two years after the sale.

2.The deduction is equal to the actual investment or the capital gain, whichever is lower.

3.If you plan to utilize the gain to build a house, do it within three years of the sale of the property. Cost of land too can be a part of the construction cost.

Exemption under Section 54 EC on purchase of specific bonds

If the profit is reinvested in specified bonds, section54EC grants exemption on long term capital gains arising from sale of land and buildings. This exemption is available only if the reinvestment is made within 6 months from the date of sale of the house and the maximum limit is up to Rs.50 lakhs. Interest is available @5.25% with a lock in period of 5 years. The amount received on maturity is tax free. These specified bonds are issued by-

1. The Railway Finance Corporation-IRFC Bonds
2. The National Highways Authority of India-NHAI Bonds
3. The Rural Electrification Corporation-REC Bonds
4. Power Finance Corporation Limited-PFC Bonds

Both the residential and commercial buildings qualify for such an exemption under the section. The return (interest income) on the investments thus made are however subject to tax.

How to avail the said exemption?

• The investment must be made within six months of the date of sale of the immovable property but before the Income Tax Return filing date to claim the exemption.
• The investments made before April 2018 could be redeemed within 3 years, but investments made after that can be redeemed only after 5 years.
• The exemption is applicable to long term capital gains only and it is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
• The maximum limit is Rs. 50 lakhs.

1.The respective bond form should be downloaded from the sites of the issuing authorities of the bonds.

2.Choose the ‘direct’ option on the page.

3.Select the number of forms to download.

4.Enter the captcha to download

5.The form gets downloaded in a zip file format.

6.Unzip and extract the form.

7.Take a printed copy of the form and fill it as per the instructions.

8.Attach a demand draft/account payee cheque and other necessary enclosures at the designated branches of banks which are-Axis Bank, HDFC Bank, Canara Bank, IndusInd Bank, ICICI Bank, IDBI Bank and Yes Bank.

9.A deposit can be made directly through NEFT/RTGS. You have to fill the application form that’s available on the website online and mention the UTR number at space given in the form.

Indexation benefit is available while calculating the long-term capital gains tax. You can take professional advice to carry out the transaction.  

This article is written by Rupal Vasavada, a financial blogger. She is passionate about writing articles on topics on finance.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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