What exactly is the Capital Gains Tax (CGT)?
Any gain or profit earned by an individual from the sale of a capital asset is referred to as capital gain. The profit made from the sale of the capital asset is taxed as ‘Income from Capital Gain.’ Profit is made by selling the capital asset for a higher price than it was purchased for. Because there is only a transfer of ownership and no sale, capital gains tax does not apply to inherited property. Any asset received as a gift by will or inheritance is completely exempt from the Online Income Tax Act 1961. However, CGT will apply if the individual who inherits the asset decides to sell it.
Capital Gains Tax on Real Estate:
- Capital gains tax is levied on the profit made from the sale of real estate, but not on the entire amount. If a person sells a property within three years, it will be taxed directly according to the income tax bracket the person falls under and will be referred to as a short-term capital gain.Short-term capital gains are taxed at a flat 20% rate.
- Income tax exemption is available on long-term gains from the sale of a capital asset under sections 54 and 54F of the IT Act if the investment is made in the construction and purchase of a house property, subject to certain conditions. To qualify for the tax exemption, the individual must purchase the residential house within two years of the transfer of the original house or within one year of the transfer of the original house. Any under construction properties must be completed within three years of the original house’s transfer date. It is critical to remember that any investment in real estate should be made in India.
- The advance paid for the sale of a house property is taxed, and it is later fortified by the person for sale of flat if the transaction fails. The advance amount is taxed in the same year under the heading of ‘income from other sources.’ When calculating capital gains, the advance amount can be subtracted from the asset’s acquisition cost in the year the capital asset is sold.
- An individual can build or buy a house with capital gains within two years of selling the house property. Furthermore, the individual can book a flat and save money on taxes with the capital gain. Aside from that, the individual can benefit from a tax break by investing capital gains in a bank’s Capital Gains Account Scheme (CGAS). Aside from that, within 6 months of the sale of the property, one can invest in specific bonds such as National Highway Authority of India and Rural Electrification Ltd.
- However, capital gains tax on property provides tax exemption, however, it is important to remember that with one sale of property, one can only invest in one new asset and cannot invest in multiple assets to minimise tax. If a person sells more than one property, they can only invest the accumulated capital gain in one new property.
Capital gain in the short term
When assets are bought and sold in a short period of time, the beneficiary who profits from the sale must pay short-term capital gains tax. To fix this liability, the government determines the period that may qualify as ‘short’ for tax purposes. In India, for example, if a property was sold within 36 months of purchase, a short-term capital gains tax was levied. From fiscal year 2017-18, this period was reduced to 24 months.
Long-term capital gains are gains derived from the sale of a property held by the assesse for more than a specified period of time (LTCG). The finance minister proposed in the Union Budget 2017-18 to reduce the tenure of LTCG from three to two years. This means that any immovable property transferred after April 1, 2017, will be considered long-term if it has been held for more than 24 months. This move is expected to benefit property investors in particular, who are looking for a quick exit option to switch investments or book profits.
Long-term capital gains
- Any immovable property held for more than two years is considered long-term, and the profit on its sale is taxed at 20% plus cess and surcharge. However, under certain conditions, a taxpayer may be exempt from long-term capital gains tax:
- Section 54 exempts LTCG tax on the sale of a residential house if the indexed capital gains are invested in the purchase or construction of another residential house within a specified time frame.
- Section 54F exempts LTCG tax on the sale of any asset other than a residential house if the net sale consideration is invested in the purchase/construction of a house within a certain time period and subject to certain other conditions.
- Section 54EC provides for an exemption from LTCG tax of up to Rs 50 lakhs if the indexed capital gains are invested in government-notified bonds within six months.
Property capital gain over time
When investing capital gains in the purchase of a new house, if the gains are not used to purchase or construct another house by the date of filing one’s income tax return, the unutilized amount must be deposited in a Capital Gains Deposit Account in any public sector bank. The new house can be purchased or built by withdrawing the funds from this account within the time limit specified.
How Can I Reduce Capital Gains on My Home?
Some methods for reducing capital gains tax on your property include:
Capital Gains and Losses
- Setting off all of your capital gain losses is one of the best ways to save on capital gains tax. You can set your capital gain profits against your losses, but your losses must be from a prior date. You can also set your short-term capital losses only against short-term gains and your long-term capital losses only against long-term gains. You can deduct your long-term losses from your long-term gains for up to eight years if you file them. However, you must also file your income tax return on time before the deadline. Scheme for Capital Gains Accounts (CGAS)
- Investing in the Capital Gains Account Scheme is one way to reduce your capital gains tax (CGAS). This scheme is appropriate for those who are unable to invest in new property before filing their income tax returns. The investment period for this scheme is three years. If you are unable to build a house immediately after receiving a capital gain (but intend to do so in the near future), you can deposit the profit amount in any public sector bank under the Capital Gains Account Scheme (CGAS).
- If you do this, you will have three years to begin building your property. If this is not the case, the capital gain will be taxed as a long-term capital gain (at 20% plus a 3% cess).
- You can deposit your money in two types of accounts under the CGAS scheme: savings deposit accounts (called Type-A accounts) and term deposit accounts. Type-B accounts offer either cumulative or non-cumulative interest. You can transfer funds between the two accounts by paying the fixed fees, but you can only withdraw funds from Type-A accounts if you submit a declaration that the funds will be used to build a house within 60 days. Any funds that have not been used must be re-deposited.
Purchasing Bonds
Investing in bonds within six months of selling the property and receiving the gains is one way to save on capital gains tax. Bond investments are tax-exempt under Section 54EC of the Indian Income Tax Act of 1961. You should keep in mind, however, that you must hold these bonds for at least three years. It is recommended that you do not invest for more than three years because you will not earn any interest and will not be able to transfer these bonds to another party.
The bonds in question are issued by the Rural Electrification Corporation and the National Housing Authority of India (the National Highways Authority of India). If you transfer or borrow against these bonds within three years, you will be subject to capital gains tax. Remember that you can only invest Rs. 50,000 in these bonds per fiscal year.
The sale of farm land is exempt from capital gains tax unless it is within the boundaries of (or up to 8 kilometres from) a municipality, municipal corporation, town committee, cantonment board, or any other civic body with a population of (or greater than) 10,000 people.