How To Save Tax on Purchase of New Property/Flat and How to Settle Capital Gain Tax and Section 54 of Capital Gain
If you are planning to purchase a new flat, there are various ways to save tax under the Income Tax Act. In this article, we will discuss some of the most common ways to save tax on the purchase of a new flat.
1. Deduction under Section 80C: Section 80C of the Income Tax Act provides a deduction of up to Rs. 1.5 lakh from your taxable income for certain investments and expenses. This includes the payment of the principal amount on your home loan for the purchase of a new flat. You can claim this deduction in the year in which you make the payment.
2. Deduction under Section 24: Section 24 of the Income Tax Act provides a deduction of up to Rs. 2 lakh from your taxable income for the payment of interest on a home loan for the purchase or construction of a new flat. The deduction is available only for a self-occupied property, and it is limited to the amount of interest paid during the financial year.
3. Deduction for First-Time Homebuyers: Under Section 80EEA, first-time homebuyers can claim an additional deduction of up to Rs. 1.5 lakh from their taxable income for the interest paid on a home loan for the purchase of a new flat. To be eligible for this deduction, the value of the flat should not exceed Rs. 45 lakhs, and the loan should be sanctioned between 1 April 2019 and 31 March 2022.
4. Joint Home Loan: If you are planning to purchase a new flat jointly with your spouse or any other person, you can avail of the tax benefits available under Sections 80C and 24 on the payment of principal and interest on the home loan. The tax benefits will be divided in proportion to the ownership share of each co-borrower.
5. Capital Gains Exemption: If you have sold any capital asset, such as shares or property, and have earned long-term capital gains, you can use the proceeds to purchase a new flat and claim exemption under Section 54. Under this section, you can claim exemption from capital gains tax if you use the proceeds to purchase a new residential property within two years from the date of sale, or construct a new residential property within three years from the date of sale.
HOW TO SETTLE CAPITAL GAIN TAX
If you have earned capital gains from the sale of any asset, you are required to pay capital gains tax on the gains. However, there are ways to settle capital gains tax liability and minimize your tax burden. Here are some ways to settle capital gains tax:
1. Invest in Capital Gains Bonds: Under Section 54EC of the Income Tax Act, you can claim exemption from long-term capital gains tax if you invest the proceeds from the sale of any long-term capital asset in specified bonds issued by NHAI or REC within six months from the date of sale. The maximum amount that can be invested in these bonds is Rs. 50 lakhs in a financial year. These bonds have a lock-in period of five years and offer a fixed rate of interest.
2. Purchase a Residential Property: Under Section 54 of the Income Tax Act, you can claim exemption from long-term capital gains tax if you use the proceeds from the sale of a residential property to buy or construct another residential property. The exemption is available if the new property is purchased within two years of the sale or constructed within three years of the sale. The amount of capital gains that can be exempted under this section depends on the cost of the new property.
3. Invest in Equity Linked Savings Scheme (ELSS): ELSS is a type of mutual fund that invests primarily in equity shares and offers tax benefits under Section 80C of the Income Tax Act. If you invest in ELSS, you can claim a deduction of up to Rs. 1.5 lakh from your taxable income, which can help you settle your capital gains tax liability.
4. Offset Capital Losses: If you have incurred capital losses from the sale of any asset, you can offset them against your capital gains. Under the Income Tax Act, you can carry forward capital losses for up to eight years and offset them against future capital gains.
5. Pay Advance Tax: If you have earned capital gains during the financial year, you are required to pay advance tax on a quarterly basis. Failure to pay advance tax can attract penalties and interest. By paying advance tax, you can ensure that you do not have to pay a large amount of tax at the time of filing your income tax return.
SECTION 54 OF CAPITAL GAIN
Section 54 of the Income Tax Act provides for exemption of long-term capital gains arising from the sale of a residential property if the proceeds are invested in another residential property. However, there are certain limitations on the amount of exemption that can be claimed under this section. Here are the limitations under Section 54 of the Income Tax Act:
1. Investment in One Residential Property: The exemption is available only if the proceeds from the sale of a residential property are invested in one residential property. You cannot claim exemption if you invest in more than one residential property.
2. Time Limit for Investment: The new residential property must be purchased or constructed within two years from the date of sale of the original residential property. If the new property is under construction, the construction must be completed within three years from the date of sale of the original property.
3. Value of New Property: The amount of capital gains that can be exempted under Section 54 is limited to the cost of the new residential property. For example, if the cost of the new property is Rs. 50 lakhs and the capital gains from the sale of the original property are Rs. 60 lakhs, only Rs. 50 lakhs can be exempted and the balance Rs. 10 lakhs will be subject to capital gains tax.
4. Sale of New Property: If the new residential property is sold within three years of its purchase or construction, the capital gains exemption claimed earlier will be reversed and will be added to your taxable income in the year of sale of the new property.
5. Holding Period: The original residential property must be held for at least two years to qualify as a long-term capital asset. If the property is held for less than two years, the gains will be treated as short-term capital gains and will not qualify for exemption under Section 54.
Author Bio
