How to save on long-term capital gains tax from a residential property sale.

By Abhay Shah, Realty Quarter

Profits derived from the sale of a house with a holding period over 24 months are referred to as long-term capital gains and are taxed at the rate of 20.80%. In various ways, you can save long-term capital gains. Profits derived from the sale of a house with a holding period over 24 months are referred to as long-term capital gains and are taxed at the rate of 20.80%. In various ways, you can save long-term capital gains.

Residential Property Investment:

If a long-term capital gain is derived from the sale of housing property, a tax-free exemption under section 54 of the Income Tax Act is the first alternative. Section 54 requires for the acquisition of any other housing estate in India of your long-term capital gains. The investment can be made in a ready house or to build a new house. Even booking of an under-construction house is treated as construction of a house by you. Investing money in a ready-to-use house is required in two years from the sale of the residential house. You can still apply for a long-term capital gains tax exemption even if you have purchased your new home a year before the old home was sold. If the exemption is to be claimed, by reserving an under-construction house or constructing a home by you, the construction of the property should be finished within three years of its date of sale of the house. If you began building the house before the sale of the residential property or have booked another residential property before the sale of the residential house, you may still claim this exemption until the building is finished in three years and the investment takes place after the selling date.This long-term capital gains exemption under Section 54 can only be claimed if the investment is made in India and that too in one residential house only.

Capital Gains Bonds:

The second way to save tax on long-term capital gains from the sale of a residential property is by investing the same in capital gains bonds of specified institutions. Presently, it’s authorized to issue such bonds by Rural Electrification Corporation (REC), National Highways Authority of India (NHAI), Railway Finance Corporation (RFC) and Power Finance Corporation Limited (PFC). Investments in such bonds must be created within six months of the day the property is sold. Although the six-month period is after the filing date of the income tax return, as mandated by section 54, you are not required to make any deposit into any capital gains account. Currently, the interest rate of these bonds is 5.25% per annum and its term is of five years. The interest on these bonds is taxable, but the redemption proceeds of these bonds are tax-free.

Individuals entitled for the exemption from long-term capital gains tax are as follows.

Individual and HUF assesses only are eligible for the benefit of the tax exemption through residential house investment. All assesses are however able to claim the tax exemption by investing in bonds. If you have previously claimed a tax exemption on the sale of a house property, you can use one or a combination of the options to claim exemption, as there are no limits on claiming a single option.