Tax Exemption Provision for Capital Gains through Property

 

Real Estate Capital gains is one of the biggest single transaction gains that you would ever have in your portfolio. If the Capital Gain is high, the tax liability would obviously be one of the highest. In one of our recent posts, we studied in detail about the tax liability on capital gains on account of real estate or property. ( Preserve your Property Gains ). 

Hence, it becomes all the more important to understand what you can do with the capital gains that we have so as to minimize or completely eliminate any such tax liability. A small understanding of facts here can save us lacs of rupees in terms of tax savings in a single transaction.

Here are some facts that you should be aware of :

1) All tax exemption provisions for capital gains through sale of property (as listed in the subsequent points) are applicable only if you have incurred Long Term Capital Gains. There is no tax exemption possible for Short Term Capital Gains. (Refer Preserve your Property Gains ).

2) Re-invest in buying new property : If you invest part  / full amount of your capital gains in a new residential house property, then you are 100% exempted from taxes on Capital Gains. Remember that this re-investment needs to be done between the time period of either a year before or two years after the sale of the original residential property.

3)Re-invest in construction of a new property : The same benefit as given in pt 2 above is also available if you invest your capital gains (either partial or full) for the construction of a new residential property. Remember that the new property construction has to be done within 3 years of the sale of the original house property.

4) Partial Capital Gains Re-investment : If you invest, lets say, 70% of our capital gains, you get tax exemption on the 70% part of your capital gains. You will have to pay long term capital gains on the remaining 30% gains.

5) The newly acquired residential property (as in pt 2 above) has to be held for at least 3 years. If you sell the new property in less than 3 years, then you will have to pay tax on the entire capital gain that was tax exempted earlier and also the applicable capital gains on the newly acquired property.

6) You can also save taxes on capital gains by investing in specific bonds issued by National Highway Authority of India (NHAI) and Rural Electrification Corporation. This investment needs to be done within a maximum of 6 months of the transfer of the original house property. Also, these investments in bonds cannot exceed a maximum limit of Rs. 50 Lacs. Just like re-investment in property, the investment in bonds has to be held for a minimum period of 3 years.

7) While you are doing these re-investments, some of which may take time to materialize (may be even years), where do you hold your capital gains in that interim time period which tells the government that you intend to reinvest these capital gains within the time frame given in all the above options, and are hence not liable for taxes? The right procedure for that is to open a separate CGAS account (Capital Gains Account Scheme). You need to put all your capital gains during a financial year into this CGAS account (which can be opened with any bank) before the end of the financial year in which you did the sale of your property. The amount deposited is deemed to be earmarked for purchase or construction of a new residential property, and is hence not taxable during that year.

In nutshell, never sell a property for capital gains in less than 3 years. 

Once you have crossed the 3 year threshold, there are so many options available to re-invest your capital gains to avoid taxes.

Cheers

Manoj Arora

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