Investing in real estate comes with a lot of benefits, provided you are willing to use your financial resources and sustain the acquired property. While selling a house is a monetary benefit, it entails legal procedures. You should also be aware of the timeline as to when you are selling property, as, again, it comes into legal considerations.
To avoid hefty taxes, you must be aware of the criterion in selling property and the applied taxes. Dive into the article to learn more about such taxes and how you can avoid or, perhaps, reduce them.
Understanding Captial Gain
Before proceeding further, have a brief understanding of what capital gain means. When held over a longer period, your property is bound to increase its value, given the period of development and other economic factors. It is not applicable for all the assets like cars or machinery as their value depreciates after wear and tear. Capital gain is defined as the accumulated return earned after holding your asset. A capital gain occurs only when the selling price of the asset is greater than the original selling price. In the reversal of the situation, the criterion gets termed as a capital loss.
If you sell your house after 24 months, the profits get treated as long-term capital gains. You can calculate the long-term capital gains by subtracting the house’s indexed cost from its net sale price. Once computed, you have to pay tax at a flat rate of 20.80% on the concluded amount, which is pertinent irrespective of your tax slab.
However, if you have no other income or your other income is less than the taxable limit, the amount by which your other sources of income fall below the basic exemption limit reduces your taxable capital gains. If you sell your house within 24 months of acquisition, the profit gets treated as short-term capital gains and leaves no prospect for you to avoid tax on such profits.
These short-term capital gains are treated as your other regular income. If your taxable income, including these short-term gains, exceeds Rs 2.50 lakh, you must pay tax. The exemption limit for people over 60 but below 80 years is Rs. 3 lakh. People over 80 years have no tax liability if their aggregate total does not exceed over Rs 5 lakh.
Exemption on purchase of another house
You can claim an exemption from tax on long-term capital gains on the sale of a residential house if you invest the taxable long-term capital gains in a ready-to-move-in house within two years of the sale date. If a ready-to-move-in house was purchased before the date of sale but within one year of the date of sale, the exemption is still available.
In India, this exemption is only available for investments in one residential house, but income tax laws allow you to invest long-term capital gains on a house in two houses and claim an exemption on the long-term capital gains on one of them.
Furthermore, If you build a house within three years, you can also claim an exemption from paying such long-term capital gains. Booking a house that is still being built is treated the same way as booking a completed house. If you intend to purchase a property by booking an under-construction property, please ensure that you receive possession of the property within the aforementioned three-year period.
Another way to avoid paying tax on long-term capital gains is to invest them in bonds issued by certain financial institutions such as the National Highway Authority, Rural Electrification Corporation, Railway Finance Corporation, and others. However, make sure to purchase them within six months of the sale date.
These bonds have a five-year term during which they can be redeemed or mortgaged to obtain any facility. If the bonds are not redeemed or mortgaged, the exemption is revoked. These bonds have a 5.25% annual interest rate. The maturity proceeds are tax-free, even though the interest on these bonds is fully taxable.
You can follow these mentioned tactics to keep hard-earned money and reap the benefits. Make sure you through every detail and limitation to save the most out of your investment.