Tax is not just levied on the income earned by you but also on the sale of a property. This is termed as Capital Gains Tax but its payment can be prevented to an extent through certain advantages made available to the property sellers, more so in the case of LTCG as against STCG. Both the abbreviations stand for Short Term and Long Term Capital Gains, respectively. The provisions have been discussed in detail.
To be clear, Capital Gains Tax refers to the tax charged on the profit earned from selling a property. The Short Term tax has to be paid when you hold the residential property within 24 months right before the date of its transfer, based on your income-tax slab. If that holding period exceeds 24 months then LTCG is taxed at a rate of 20 per cent accompanied by indexation benefits.
Well, there is a way to escape it under Section 54 of Income Tax if you purchase another property after selling one. In this process, you will have to invest the capital gains earned into the construction or buying of not more than 2 properties. Before the Budget of 2019, the number of property purchase was restricted to 1. The thing to note is that this exemption can be claimed just once and that too, only if the amount of gain has not crossed the limit of 2 crore rupees.
The entire sum of money as LTCG has to be reinvested if you wish to skip the payment of tax on it. You can avail of the pro rata relief if not using the whole of capital gains from the property sale in buying the new property. Short-Term Capital Gains Tax will be charged on the profits earned from the sale of the new property if it is sold within 36 months of its purchase.
You need not unwillingly utilize the profits earned from your property sale by investing them further in Real Estate only for claiming exemption of LTCG tax. Section 54 EC of the Income Tax Act has a way out for you. It provides LTCG exemption on the profits received from a house, non-residential property or land through the investment of capital gains in distinctly specified bonds within 6 months. These include bonds under 54 EC such as those issued by Rural Electrification Corporation, National Highway Authority of India, etc. The amount limit for investment is 50 lakh rupees. The bonds offer interest at a rate of 5.75 per cent that is taxable. Investing in Real Estate is a far better choice due to the unattractive rates of bonds.
To prevent such a situation from arising, you have to buy new properties either 2 years after or 1 year before selling the existing property. If you don’t want a readymade property then the construction work has to be finished before the date of the existing property transfer has completed 3 years. The exemption can’t be claimed if you fail to reinvest the capital gains earned from the sale of a house in the construction or purchase of a new one. To avoid the income being taxable, in that case, the amount must be deposited in CGAS (Capital Gains Account Scheme). Section 54 of Income Tax makes provision for exemption of tax on capital gains even if they have been used to repay the loan taken for purchasing the new property.
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