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Capital Gain Tax Exemption

We often ignore the impact of capital gain tax on sale of property. Real estate investment is one of the most favored investment vehicle in India. Particularly in cities like Mumbai, Delhi, Bangalore, Pune, Hyderabad etc where property development is rampant, people sometimes buy and sell property casually.

There is no restriction of when a person can sell the property, but the liability of capital gain tax must be kept in mind before selling. Government will tax the capital gain come whatever may. But a slight in-depth research will surface the possibility to avail capital gain tax exemption.

Tired of reading? We will speak it for you…

Hurdle 1 – STGCT

Selling property before 3 years will attracts short term capital gain tax (STCGT). There is no way one can legally avoid STCGT. So better is not to sell the property before 3 years. STCGT to be paid in accordance with ones income tax slab. If someone’s income tax slab is 30%, capital gain tax applicable will be @30%.

Hurdle 2 – LTGCT

Selling property after 3 years of holding time attracts long term capital gain tax (LTGCT). Long term capital gain tax is applicable @20% flat. But Indian government provides capital gain tax exemption under certain conditions. These exemptions are provided to popularize the concept of property investment in India.

Capital Gain Tax Exemption

Hurdle 3 – 80C getting Reversed

So does it mean that if one sells property after 36 months, there will be no problems? Unfortunately No. Its a pity but we have to still live with the tax hurdles created by our good government. I call these IT rules as common man’s trap. Its only we who can fall in this trap. People who can afford expensive investment advisers will seldom make the mistake. One may not be able to sell property before 60 months, why? Here is the reason. Generally we buy residential property on home loan. This home loan also helps us to save income tax u/s 80C & 24(b). IT act says, if someone has taken tax exemption upon payment of loan-principal u/s 80C cannot sell house before 5 years. If they sell, their tax benefits (80C) will be reversed. All tax deductions one has claimed under 80C in preceding years will treated as INCOME. This INCOME will be added to the ‘capital gain’ happened due to sale of property before 5th year. It means that the capital gain gets inflated. But deductions u/s 24(b) will be safe always.

Hurdle 4 – Capital Gain Account

Ok perfect, then if one sells property after 5 years, then he may not worry about anything but how to claim tax exemption? No, our humble government authorities has further created one hurdle. The capital gain amount in case of LTGCT must not be kept idle in savings account. If ones intention is to claim capital gain tax exemption then gain amount must be necessarily kept in Capital Gain Account offered by banks. The amount deposited in capital gain account must be reused to buy a new residential property withing next 3 years. If not done, long term capital tax will be applicable.

How to Claim Capital Gain Tax Exemption?

Once people crosses the above 4 hurdles, they are now free to think about how to claim capital gain tax exemption. It is point worth repeating here that there is no legal way to avoid short term capital gain tax upon sale of property.

Case 1 – Claim Capital Gain Tax Exemption – u/s 54

To be eligible for capital gain tax exemption (LTCGT) one must invest the ‘capital gain’ withing 2 to 3 years from sale of residential property as listed below:
– 2 year > LTCGT will not be applicable if one buys a residential property withing 2 year of transfer of property
– 3 year > LTCGT will not be applicable if one constructs a residential property withing 3 year of transfer of property.
– 1 year If one bough first property in say year 2011 & a second property in year 2012. He then sells the first property in 2015 with a capital gain. In this case he need not buy a third property. He can still claim the capital gain tax exemption in 2015 again his second property bought in 2012.

Case 2 – Second Property Sold within next 3 years
In case the second property acquired above is sold within next 3 years, LTCGT calculation will be slightly different. The cost of purchase of the property (in case 2) considered for LTCGT calculation will be reduced by capital gain calculated in case 1. This means the calculated capital gain will increase in value.

Case 3 – In case person does not want to re-invest in real estate property
In case person do not want to invest the gain amount in residential property even then there is no problem. The gain amount must be used to buy a government of India bond. The bond issued by NHAI or REC will be eligible for capital gain tax exemption. But the only problem is, one must buy such bond withing next 6 months of transfer of property. The maximum value one can invest in such bonds is Rs 50 Lakhs. The lock-in period for such bonds is 3 years from date of property sale.

Capital Gain Tax Exemption

Case 4 – Property is sold at loss
In case the property is sold for a loss, then long term capital gain tax will not be applicable.

Example of Capital Gain Tax Calculation

To calculate accurately capital gain tax we must first know accurately the ‘total cost of acquisition’ of property. Total cost of acquisition will be equal to price paid to the owner + stamp duty + registration charge + brokerage + legal expenses etc. Secondly one must also know accurately the ‘total sale price’. Total sale price will be equal to price received for sale – stamp duty – registration charge – brokerage – legal expenses etc. One must also know the cost inflation index (CII) for year of sale and year of purchase.

Capital Gain Tax Calculation

Cost Inflation Index (CII) Chart 2016

Financial Year Index Financial Year Index
1981-82 100 1999-00 389
1982-83 109 2000-01 406
1983-84 116 2001-02 426
1984-85 125 2002-03 447
1985-86 133 2003-04 463
1986-87 140 2004-05 480
1987-88 150 2005-06 497
1988-89 161 2006-07 519
1989-90 172 2007-08 551
1990-91 182 2008-09 582
1991-92 199 2009-10 632
1992-93 223 2010-11 711
1993-94 244 2011-12 758
1994-95 259 2012-13 852
1995-96 281 2013-14 939
1996-97 305 2014-15 1024
1997-98 331 2015-16 1081
1998-99 351 - -


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