How to Avail Capital Gain Tax Exemption – Real Estate

We often ignore the impact of capital gain tax on sale of property.

Real estate investment is one of the most favoured investment vehicle in India.

In cities like Mumbai, Delhi, Bangalore, Pune, Hyderabad etc, where property development is rampant, people sometimes buy and sell property rather casually.

There is no restriction on 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.

A slight in-depth research will surface the possibility to avail capital gain tax exemption.

#1. How much capital gain tax is applicable…

“Capital gain” is nothing but a financial jargon used for “profit”.

As per rules, any profit is liable for taxation.

Business men has to pay tax on the profits arising from their operations.

Similarly, investors must also pay tax on the profits arising as a result of their holdings being sold for profit.

But not all profits are treated in the same way. Tax liability is calculated based on following 2 factors:

  • Short Term Capital Gain Tax (STCG Tax).
  • Long Term Capital Gain Tax (LTCG Tax).

The variations has been summarised here for a better understanding:

#1.1 Real Estate:

STCG Tax (Holding time is less than 2 years):

  • Tax @as per ones income tax slab.

LTCG Tax (Holding time is more than 2 years):

  • Tax @20% (with indexation benefits explained in this article).
#1.2 Equity:

STCG Tax (Holding time is less than 1 year):

  • Tax @15%.

LTCG Tax (Holding time is more than 1 year):

#1.3 Debt Mutual Funds:

STCG Tax (Holding time is less than 1 year):

  • Tax @as per ones income tax slab.

LTCG Tax (Holding time is more than 1 year):

#2 Short Term Capital Gain Tax – Real Estate

Selling a real estate property before 2 years will attracts short term capital gain tax (STCG Tax).

(Before Union Budget 2017, STCG Tax was considered if holding time was less than 3 years).

There is no way one can legally avoid STCG Tax. So better is not to sell the property before 2 years.

STCG Tax 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%.

#3 Long Term Capital Gain Tax – Real Estate

Selling property after 2 years from the date of purchase, attracts long term capital gain tax (LTGC Tax).

Long term capital gain tax is applicable @20% (with indexation benefits).

But Indian government provides long term capital gain tax exemption under certain conditions.

These exemptions are provided to popularise the concept of property investment in India.

What is the condition under which one can get exemption from long term capital gain tax?

There is a concept called indexation benefit?

After application of indexation benefits, one can either avoid payment of LTCG Tax or at least substantially lower ones income tax liability.

What is indexation benefit?

The same is explained here…please continue reading.

Capital Gain Tax Exemption - Real Estate

#4 Further care to be taken after sale of property

Does it mean that, if one sells property after 2 years, there will be no problems? Only LTCG will be applicable?

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.

#4.1 Better sell property after 5 years, why?

If you will not do this, 80C Tax benefits claimed may get reversed

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.

#4.2 Make sure to reinvest the “Capital Gain” amount.

What is the gain amount, remember? Profit portion.

It is essential to reinvest the capital gain amount.

Even if you have taken the following 2 cares, the trouble is still not over:

  1. Selling property after 2 years to avoid LTCG Tax (but you are forced to sell after 5 years. See Sl.2).
  2. Selling property after 5 years (to avoid 80C tax benefits getting reversed).

Even after taking taking these cares, there is one more condition. One more common man’s trap.

The trouble is still not over?

The capital 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 within next 3 years.

If not done, long term capital tax will be applicable.

#5. How to Claim Capital Gain Tax Exemption?

Once people crosses the above 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.

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

To be eligible for long term capital gain tax exemption (LTCG Tax), one must reinvest the ‘capital gain’ within 2 to 3 years from sale of residential property as listed below:

  • Within 2 year – LTCG Tax will not be applicable if one buys a residential property within 2 year of transfer of property.
  • Before 3 year > LTCG Tax will not be applicable if one constructs a residential property within 3 year of transfer of property.
  • Within 1 year – If one bought the 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.
#5.2 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.

#5.3 Case 3 – In case person does not want to re-invest in real estate property

In case person do not want to reinvest 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 within 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 the date of property sale.

Capital Gain Tax Exemption - Real Estate

#5.4 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.

#6 Example of Capital Gain Tax Calculation

To calculate accurately capital gain tax, we must first know 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 2017-18

Capital Gain Tax Exemption - CII chart 2017-2018

Disclaimer: All blog posts of are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyse all securities before investing in one.

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2 Comments on "How to Avail Capital Gain Tax Exemption – Real Estate"

  1. deepak kunwar | April 20, 2018 at 12:01 pm | Reply

    I and my mother sold an apartment in 2014. We bought another apartment in feb 2015 in jointly and reinvested the gains. We are now planning to sell the apartment in May 2018. Whether the capital gain benefits taken by us will be reversed

  2. Thanks for a detailed explanation. So, all these details are applicable for purchase of LAND or RESIDENTIAL PROPERTY. Any of them? No change in the settlement except for given above?

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