How to Save Capital Gains Tax When Selling a Property?

Capital gains tax means when you sold your property and made a profit from it. Let’s say you bought it, kept it for a year, and then sold it. In that case, the money made from selling it will be thought of as short-term capital gains. These gains are added to your taxable income and taxed based on your income bracket. There are no ways to get out of paying this kind of taxes

But if you kept your property for, five years, any money you made from selling it would be considered long-term capital gains. Long-Term Capital Gains Tax is the name of the tax you will have to pay on it. It is 20%. (LTCG Tax). Because real estate deals are usually expensive, the taxes you have to pay can be a lot, and you would want to save as much as you can.

There are a number of exemptions you can use to lower or get rid of the LTCG tax you have to pay. Here’s how to understand them:

Under Section 54 of the Income Tax Act of 1961, a person who sells a home can avoid paying taxes on long-term capital gains if the money from the sale is used to buy or build another home. Remember that this exemption only applies to long-term investments (in our case, immovable properties with a holding period of more than two years).

• The seller must buy a home either one year before selling the original property or two years after selling the original property.
• If you’re constructing a home with the money you got from selling a property, the work should be done within three years of when you sold the first property.
• India must be the place where the new home is built.
• If the newly bought or built property is sold within three years of its purchase or construction, the tax break will be taken away.
• If the amount invested in the new property is more than the number of capital gains made from the sale of the first property, the exemption will only cover the number of capital gains. If the amount put into the new property is less than the number of capital gains made, the remaining capital gains will be taxed at a flat rate of 20%.

It can take some time to find a good property to reinvest your capital gains in, get all the money you need, and get all the paperwork in order. So, if you haven’t been able to reinvest your capital gains in a new property by the time you file your income tax returns, you can put these gains into a “capital gains account” at any of the branches of authorized banks, such as Bank of Baroda, except for the rural branches of these banks. This deposit can help you avoid paying taxes on capital gains.

If the amount deposited isn’t used within two years (if it’s for buying a new home) or three years (if it’s for building a new home), it will be treated as short-term capital gains in the year that the specified period ends.

Section 54EC of the Income Tax Act lets you put your profits from selling a property into “Capital Gain Bonds” if you don’t want to buy a new home or build a new one. These are also called “54EC bonds,” and they are one of the most common ways to save on Long-Term Capital Gains Tax.

There are a few rules:

• The least you can invest in 54EC bonds is one bond worth Rs 10,000, and the most you can invest is 500 bonds worth Rs 50 lakh.
• Only Power Finance Corporation Limited (PFC), National Highways Authority of India (NHAI), Rural Electrification Corporation Limited (REC), and Indian Railways Finance Corporation Limited (IRFC) are allowed to issue eligible bonds under Section 54EC (IRFC)
• Since April 2018, you can’t sell or give these bonds to someone else. They are locked in for five years.
• The interest rate on 54EC bonds is 5% per year. This interest, however, is taxed.
• Within six months of selling the property, the money must be put into these bonds. Also, the investment must be made before the deadline for filing taxes.

Since these bonds are backed by the Indian government, there isn’t much risk involved. Also, you can save on taxes and make money from the interest.

As you can see, the Income Tax Department has given you a lot of great ways to avoid paying long-term capital gains tax. Before making such a choice, it would be smart to spend some time thinking about your financial goals. You can also talk to people who know about money about these kinds of investments.

Disclaimer: The opinions shown above are mainly for informational reasons and are based on market research. Deal Acres is not responsible for any actions made as a result of relying on the provided material and makes no representations as to its accuracy, completeness, or reliability.