• Oct
  • 30
  • 2007

Residential property and capital gains

When investors make profits on sale of assets like land, shares and mutual fund units, it is termed as capital gains. The investor has to pay tax on the resulting gains that is commonly referred to as capital gains tax. The amount of money outflow from your pocket depends on how long you held the property. 

If a residential property is held by the seller for more than 36 months, it is considered a long-term investment. For investments over the short term, the short-term capital gain is added to your total income. You will be taxed depending on the tax bracket you fall in. When computing long-term capital gain, a bit more complexity is involved. Indexation is the process by which inflation is taken into account and the purchase price is proportionately increased. Consequently, the amount you end up paying as tax is reduced.

If you have sold a residential property for a profit, you can expect some relief on the capital gains tax payable, if you meet certain conditions. If the property you sold was held by you for at least three years – it is a long-term asset – you are entitled to relief if you buy a new house within two years from the date of sale. For those who are constructing a house, the work should be completed within three years from the date of sale. The final condition to be eligible for exemption is that the cost of the new house should be at least equal to the capital gain.

Let us see how to compute capital gains. Suppose a house was purchased for Rs 10 lakhs and sold for Rs 30 lakhs after four years. The transaction falls under the long-term capital gains bracket. The government publishes a cost inflation index (CII) chart for every financial year, which is used for indexation.

You must subtract the actual sale price from the actual cost of purchase to arrive at long term capital gain. To save on tax on this amount the seller must reinvest the money within two years from the sale date.

Long-term capital gains on sale of a house can be deposited under a Capital Gains Scheme of any authorised bank before the due date for filing of return of income. This may not be relevant for sellers who have already invested the entire capital gains in another house subject to conditions. The amount deposited here is considered to have been used for the purchase or construction of the new house. If the amount you have deposited is not used for buying a new house within a period of three years, the amount will be treated as long-term capital gain of the previous year.

Section 54 provides exemption on long-term capital gains arising on sale of residential property and investment of such capital gains in another residential property. The law envisages a time limit within which the investment should be made. That is two years for purchase and three years for construction. But if after the sale of the property, you cannot find another property of your choice, the amount of capital gain should be kept in any authorised bank under a Capital Gains Accounts Scheme till investment.


10 Responses to “Residential property and capital gains”

  1. HASMUKH PATEL says:

    I had purchased residence worth Rs.7 lac, 7 or 8 years back which can
    earn more than 80 lac

    and other

    residence plot which I had purchased on 15.7.10 for Rs.2.25 lac which can
    yield me minimum 12 lac. both in my wife’s name.

    Now I tend to sell these both and purchase land and another house. Can I ?
    How much gain tax will I have to pay?
    Can I invest the return in my or son’s name?

    First of all, I have planned to SALE the plot which is in my wife’s
    name, and take a new house worth 20 lacs (15 lac from plot+5 lac new
    investment). Can I do that in my, wife or son name?

    Moreover I had also booked TWO, 1 BHK, house for Rs.2.75 lacs, total
    5.50 lacs in 2008; but the builder failed to give possession or enter
    into sale deed till date. Now he seems to enter into sale deed on
    payment of my remaining Rs.1.25 lacs in next 2 to 4 months.
    Can I keep the name of my wife in these two 1 BHKs?

    Which date to be taken for long term capital gain tax – booking date
    or the date on which the SALE DEED is done.

    I shall be highly obliged to have your proper guidance.

    Thanks & Regards,

    HASMUKH PATEL

  2. anil mehra says:

    My parents constructed a house in dehra dun in 1978 and now we are selling it. What all can I add in the cost of house for calculating the Index price. Please advise and comment ASAP.

  3. girish says:

    I am NRI. My mother in law  sold a property  recently. As a portion of property share my wife got a sum of 7 Lakhs. Her status as of now is house wife. whether this amount is taxable  to what %.
    can we invest this in further purchasing any property.

  4. yashwant bhandari says:

    can anyane reinvest in more than one house property to exempt from capital gain tax?

  5. d k singhal says:

    MY MOTHERINLAW PURCHASED A HOUSE IN 1976 REG.VALUE 52000/(FIFTY TWO THOUSAND)& INVESTED RS 5 LACS IN 2000-01 & 10 LACS IN 2006-07 FOR ITS RENOVATION & FF CONST.
    1 WHAT IS ITS PRESENT VALUE ?
    2 CAN I SELL IT ON HEIGHER COST THAN THE VALUE ASSESED BY YOU ?
    3 IF YES THAN HOW TO INVEST THE TOTAL AMT RECIEVED / GAIN AMOUNT SO THAT TAX MAY BE AVOIDED?

    REGARDS
    D K SINGHAL

  6. Usha Pillai says:

    Is the exemption from capital gains tax on sale of property by reinvesting in another property allowed only if the seller does not have more than one residential property in his name?

  7. anant says:

    CAPITAL GAIN ON SALE OF PROPERTY

    PLEASE CONFIRM WHICH PRICE I HAVE TO TAKE FOR CALCULATION OF LONG TERM / SHORT TERM CAPITAL GAIN

    1. READY RECKNOR PRICE OR
    2. AGREEMENT PRICE

    WAITING FOR YOUR IMMEDIATE FEEDBACK

    THANKS

    ANANT

  8. Adish Jain says:

    FOR UNDER CONSTRUCTION RESIDENTIAL PROPERTY THE PERIOD IS THREE YEARS , IT SHOULD BE FROM THE DATE OF STAMP DUTY OR THE ALLOTMENT LETTER FROM THE BUILDER AFTER COMPILATION IS CONSIDERED . KINDLY CLARIFY . IN MY CASE I SOLD PROPERTY ON 15TH FEB 2011 , MY CAPITAL GAIN AFTER DOING INDEXATION IS RS.1.72 CORERS . I BOUGHT A NEW UNDER CONSTRUCTED FLAT & THE PAYMENT OF WHICH WAS DONE FROM MY BANKS CAPITAL GAIN ACCOUNT. THE POSSESSION OF THE FLAT WILL BE RECEVIED AFTER SEPTEMBER 2014 . SO WILL IT BE EXEMPTED FROM THE INCOME TAX OR NOT , AS WE HAVE FULL FILLED ALL THE CONDITIONS BY UTLISING THE CAPITAL GAIN AMOUNT , BUT POSSESSION RECEVIED AFTER THREE YEARS AND NOT WITHIN THREE YEARS . SO AM I ELIGIBLE FOR BENEFIT OF TAX EXEMPTION.

    ADISH JAIN
    09322279109

  9. Mitesh says:

    It will be calcuated from the day stamp duty is paid, i.e., from the date on papers.

  10. Neeta Shamdasani says:

    How is calculation of 3 yrs or 36 months considered? From date of stamp duty paid or from date of possession? I had booked my house in Jan 2007 (under construction) and got possession in August 2007. The stamp duty /franking was done in July 2007 and the registration was completed in Nov 2007. I now want to sell the house and buy a new one. Do i fall into short term capital gain bracket or can i avail of long term capital gain tax?

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