How to avoid capital gains tax in India?

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How to avoid capital gains tax in India?

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Sanjana · Answer 1 · 2021-09-02T18:23:23+00:00

Sanjana

6 September 2, 2021

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Property, whether house or land, is a capital asset. Gains from transferring of such assets lead to capital gains tax. Read below if you want to know how to avoid capital gains tax in India.

There are 2 types of capital gains on property:

Short Term Capital Gains Tax:

If you buy a property and sell it within 3 years of the purchase, then the profit from the sale comes under short-term capital gains.

Long Term Capital Gains Tax:

If you buy a property and sell it after 3 years, then the profit from the sale comes under long-term capital gains. In this case, a capital gains tax of twenty percent is applicable after indexation.

How to Avoid Capital Gains Tax on Real Estate

There are several ways to reduce capital gains on tax property.

Build Again:

If you use the sales proceeds of the property to build another one, then you can get a leeway of 3 years.

Capital Gains Bonds:

You can save on capital gains tax if you invest the sales proceeds of the property in Capital Gains Bonds. At present, 2 government entities, the Rural Electrification Corporation and the National Highway Authority of India are allowed to issue these capital gain bonds. You can invest a maximum of Rs. 50,00,000 in these bonds. Since they are government-backed schemes, the chances of these bonds defaulting are almost zero. Remember that the rate of interest provided is low at 6 percent.

Reinvest:

You can avoid paying tax on long-term capital gains if you reinvest the gains to purchase another property within a specific time frame. In order to save taxes, you’ll need to purchase the new residential property within 2 years (3 years in case of construction of a new property). The new property shouldn’t be transferred within 3 years of the purchase date or else the tax exemption will be reversed. Moreover, you can’t use this strategy to save on capital gains tax if you already own more than one property.