Tax Tips for House Sellers to Maximise Your Earnings
Selling a house can be a challenging and exciting experience, especially if you are looking to simultaneously settle on one house and purchase another. But have you given much thought to taxes on the sale of your home? While you may be aware that selling a house attracts tax, the nitty-gritties of how to save tax are mostly unclear.
To reduce your tax burden on the sale of your house, read our top tax tips for house sellers:
- Avoid Selling a House Within Three Years of Purchase
If you are selling a house within three years of purchase, you need to pay the short-term capital gains tax (STCG). In this case, the incremental gain is combined with your income and taxed directly, according to your income tax slab. You can reduce your tax burden if you hold on to your house for more than three years. In this case, any gain from selling a house attracts long-term capital gains tax (LTCG). There is a flat tax rate of 20% (plus surcharge and cess) after the gains for inflation are adjusted with the help of the cost inflation index the government issues.
- Buy a New House From Proceeds Equivalent to Long-Term Capital Gains
Want to save your entire tax outgo? Use the capital gain that accrues in order to buy another house within two years of the sale or construct one in three years. If you are investing in an under-construction property, the time period allowed is three years. The amount that you use for buying a new house is exempted from tax. If there is any balance, it will be taxable at 20% (plus cess and surcharge). You cannot buy or construct multiple properties from the resulting capital gain from selling a house and thus seek to reduce your tax burden. Are you looking to sell more than one property? You can use the cumulative capital gain amount to buy or construct a single new property.
- Invest the Proceeds in a Capital Gains Account Scheme
If you want to bide your time and do not want to immediately buy a house, you can invest the capital gains in a Capital Gains Account Scheme (CGAS). This informs the income tax department that you plan to buy a house, but at a later date. The deposits you make under CGAS are eligible for exemption from capital gains tax. However, you must make the deposit before you file your income tax returns for the fiscal year in which you have completed the sale of a house. You have to withdraw the funds within the stipulated timeframe, and use the money to buy or build a house within 60 days of withdrawal. The interest paid is taxable.
- Invest in Specified Bonds
Another option to reduce your tax burden when selling a house, and one with some scope of returns, comes from specified bonds. This is a great option for saving LTCG tax if you don’t want to buy a residential property from the proceeds. You should invest in specified bonds, such as those issued by the National Highways Authority of India or Rural Electrification Corporation Limited (under section 54EC), within six months from the date of selling a house. These bonds come with a lock-in period of three years. Also, you can only invest a maximum of Rs.50 lakh in these bonds, both in the year of transfer of your capital asset and in the year that follows. If there is a balance amount, you have to pay tax on the same.
- Use Section 54 (F)
Do you have long-term capital gains coming in from the sale of a property other than a house? You can reduce your tax burden by utilising section 54 (F) to avail of tax exemption on the sale proceeds. However, you can invest the sale proceeds only in a residential property. Also, to avail of this tax exemption you should own just one house.
- Consider the Change of Rules if You are Selling a House Under Construction
Are you selling a house that is an under-construction property after holding it for more than three years? In this case, the rules of taxation completely change. This is because the income tax department will consider you as a house owner only when you have received possession.
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