Many people specially who do not file their income tax returns are not aware that they have to pay tax in respect of profits made on sale of a residential house.  In certain circumstances, you can save these taxes. Let us discuss it in details.

Tax liability on the basis of holding period

If the house is sold after 24 months’ holding, the profits are treated as long term capital gains. The long term capital gains are computed by deducting the indexed cost of the house from its net sale price. One has to pay tax at flat rate of 20.80% on the capital gains so computed. This rate is applicable irrespective of the your tax slab. In case you do not have any other income or your other income is below taxable limit, your taxable capital gains will be reduced by the amount by which your other income falls short of the basic exemption limit. Please note that the deduction under chapter VIA like those available under Section 80 C, 80D, 80G, etc. are not available against the long term capital gains.

In case the house is sold within 24 months, the profits are treated as short term capital gains and there is no option to save tax on such profits.  Such short term capital gains are treated like your other regular income and added to the other income. You will have to pay tax if your taxable income including these short term gains gain is more than 2.50 lakhs. For those over 60 years but below 80 the exemption limit is lakhs and for those over 80 years there is no tax liability if such aggregate total does not exceed five lakhs. The amount of taxable income is computed after deducting various deductions like payment for life insurance, mediclaim, PPF,  or bank interest income etc.

First exemption option-Buy another residential house

In respect of long term capital gains on sale of a residential house, you can claim exemption from tax if you invest the taxable long term capital gains to purchase a ready to move in house within two years after the date of sale of the house. For ready to move in house, the exemption is still available if the house was purchases before the date of sale of the house buy not beyond one year from sale date.

This exemption is available only in respect of investment in one residential house in India but the income tax laws give you once in a lifetime opportunity to invest the long term capital gains on a house, in two houses to claim exemption on long term capital gains arising on one house. The one time option can  be availed if the amount of long term capital gain on sale of the house does not exceed two Crore.

You can also claim exemption from payment of such long term capital gains if you construct a house within three years. Booking an under construction house is also treated as construction of a house. In case you are planning to buy a property through booking of an under construction property, please ensure that you get possession of the property within a period of three year as specified above.

You have to utilize the amount of taxable capital gains for buying a house or for paying to the developer before the due date of filing of your Income Tax Return.  In case you are not able to use full capital gains, the unused amount has to be deposited with a bank under “capital gains scheme”. The money in capital gains account has to be used for the same purpose within the time limit failing which the balance in capital gains account would become taxable.

For the purpose of  claiming this exemption,  the brokerage, stamp duty, registration  charges and transfer charges etc paid will be included in the cost of the new house and accordingly eligible for exemption with the original cost for purchase or construction of the new property.  The house property so bought cannot be transferred within 36 months failing which the exemption claimed earlier will be reversed in the year in which you transfer the new house.

Purchase of  specified bonds

The second option to save tax on long term capital gains is by investing the capital gains in bonds of some specified financial institutions like National Highway Authority, Rural Electrification Corporation, Railway Finance Corporation etc. within a period of six months from the date of sale.

The bonds have a uniform tenure of five years during which the bonds can be redeemed or mortgaged for availing any facility failing which the exemption gets reversed. These bonds earn you interest 5.75 annually but the rate effective from 1st August 2020 is 5%.  The interest received on these bonds is fully taxable in your hands but the maturity proceeds of the bonds are fully tax free.

It may be noted that investment in both the cases has to be made even if you have not received your full sale consideration for the residential house sold. One more important thing one should know is that you cannot invest more than 50 lakhs in these bonds in a year as well as in respect of one capital gains transaction. However there is no restriction on a tax payer claiming exemption under both the option in respect of sale of the same house.

Writer is a tax and investment expert and can be reached at jainbalwant@gmail.com and @jainbalwant on twitter

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