How to Save Capital Gain Tax on Sale of Residential Property?

Hi. There are several ways to minimise or avoid capital gain tax on sale of residential property through exemptions and deductions provided under the Income Tax Act. I have shared here some of the effective strategies on how to save capital gain tax on sale of residential property. 

How to Save Tax on Sale of Residential Property?

• Long-Term Capital Gains (LTCG): If you hold the property for more than two years, the profit is classified as LTCG, which is taxed at a lower rate of 12.5%.

• Short-Term Capital Gains (STCG): If the property is sold within two years of acquisition, the gains are treated as STCG and are taxed at your applicable income tax slab rate, which may be higher.

If you reinvest the profits from the sale of a residential property into another residential property, you can claim an exemption under Section 54. This exemption applies to the LTCG and can be availed if the new property is purchased within one year before or two years after the sale.

You can also invest the capital gains in specific bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) to claim an exemption under Section 54EC. These bonds have a lock-in period of five years.

Deductible expenses incurred during the sale, such as brokerage fees, renovation costs, and legal fees, can be subtracted from the sale price, thus reducing the capital gains.

By utilising these provisions, you can learn how to save capital gain tax on sale of residential property significantly to reduce your capital gains tax liability when selling residential property.

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Many people ask about how to save capital gain tax on sale of residential property only because they aren’t aware of the ways they can actually retain the profit they gained from the transaction. But before I give you a detailed strategy to save capital gain tax on sale of residential property in 2021, I would like to tell you a little bit about what is capital gain and what are the tax provisions around it.

Capital gains are the profits gained by selling a property. There are usually two types of capital gains; short term capital gains and long term capital gains. Short term capital gains are the profits gained on a property which was sold before 24 months of holding, whereas long term capital gains are the profits gained on property which has been sold after a 24 months holding period.

The computation of long term capital gains is done by deducting the indexed cost of the house from the net sale price. The capital gains calculated are taxable at a rate of 20.80% irrespective of the tax slab. 

There are a few ways that can get you out of the fix of how to save capital gain tax on sale of residential property in 2021. Let us have a look at them.

• Settle your capital gains against losses

You can certainly decrease the tax liability by settling the capital gains with the long term losses carried forward in the last eight years and current year.

• Buy another residential property

Another option is to buy another property within 2 years after the date of sale. There is also another provision to invest in the construction of a house within 3 years of the date of sale (includes booking under construction project).

• Purchase Capital Gains Bonds

Another good option is to purchase capital gains bonds after selling your property. There is a cap of Rs 50 lakhs to invest in capital gains bonds and the lock-in period will be of 5 years. These bonds are non-transferrable and cannot be sold to anyone. 

• Investing in Capital Gains Accounts Scheme

Although it is a temporary solution, you can invest your capital gains in the Capital Gains Account scheme. There are tax exemptions for the amount invested in this scheme.

This is how to save capital gain tax on sale of residential property. It is important to be careful while making the final choice to invest your capital gains.