Introduction

CGT (Capital Gain Tax) is a tax imposed on capital gains or the profit on the sale of an asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property and there are various methods to save capital gains tax.

The point of owning assets is to get monetary benefits through them, which could either be by sale or lease/rent. The majority sells their property for a profit; every profitable sale attracts some liabilities of tax payment.Seller search for the ways to save capital gains tax If the quantity of property tends to be high, the resultant tax quantity is also high. Since, this will heavily burden investors, the Government of India has arranged down many alternatives for obtaining a tax exemption underneath the tax Act.We’ll discuss about the methods to save capital gains tax on property.

Type of capital gains

  • Short term capital gain

  • Long term capital gain

ParameterShort Term Capital Gain (STCG)Long Term Capital Gain (LTCG)
Definition

A short term capital gain earned by an individual in lieu of transfer of a short term capital asset.

A long-term capital gain is a gain from a qualifying investment owned for longer than 12 months before it was sold.

Accounting
  • Less than 36 months for regular assets (gold, property, etc.).
  • 12 months for shares
  • More than 36 months for regular assets (gold, property, etc.).
  • 12 months for shares
Tax rate
  • Tax of 20%, excluding cess and surcharge.
  • Tax rate comes down to 10% if certain eligibility criteria are met by taxpayers.
  • It is applicable in terms of securities listed on a recognized stock market, UTI/mutual fund and zero coupon bonds.
  • A gain that comes u/s 111A charges a tax of 15%, excluding surcharge and cess.
  • Gain that is not covered u/s 111A charges tax at income tax slab rate for the individual.
ComputationSTCG:
(asset sale cost ) – (expenses on asset) – (cost of improvement)

LTCG:
(cost of selling a property) – (*Indexed cost of acquisition)


*Indexation is the process of adjusting prices based on a standard index to factor in the inflation rate while calculating (and gives us a more reasonable figure) profits earned on sale of assets.

5 Methods to save capital gains tax

Method 1: Calculate the rate using Cost Inflation Index

Generally, the capital gains tax rate on property sale (long term) is 20%.This tax liability can be reduced by using cost inflation index. Using CII, we can save capital gains tax and can calculate the cost of property according to inflation. For e.g., if inflation index rises from 200 to 300 in 4 years, the real cost of the property can also be increased from Rs. 20 lakh to Rs. 30 lakh in the same time.save capital gains tax

For this index, base year is 1980-81 and the value of inflation index was 100. In 2015-16 the cost is inflation index reached up to 1081.

Capital gains on property are calculated as:

save capital gains tax

Capital gains on property after indexing is calculated as:

save capital gains tax

*Indexed cost of property is calculated as:

 

save capital gains tax

Example,

Gauri buys a house for Rs. 40 lakh in April 2011, after 5 years she sells it for Rs. 60 lakh. Calculate the capital gain?

Firstly, calculate the indexed cost of year 2011 and 2017

Cost of inflation index of 2011-12= 758

Cost of inflation index of 2015-16= 1081

Indexed cost of property = (1081/758)*40,00,000 = Rs. 57,04,485

Therefore, Capital gains = Rs. (60,00,000 – 57,04,485) = Rs. 2,95,515

Hence, the capital gains is Rs. 2,95,515 instead of Rs. 20,00,000

Also, capital gains tax on Rs. 20,00,000 would be Rs.6,00,000 but after indexing tax comes out to be Rs.88,655

 Method 2: Buy or Construct a residential house

Mr. Verma wanted to change his residence due to locality issues. He also wanted to sell his old house and to purchase another house with that money. But his objective is not to earn any profit but to acquire a suitable house. In this case, he becomes liable to pay income tax.

But U/S 54, you get a relief from paying tax. Can save capital gains tax if the sold property is not a residential property U/S 54F.save capital gains tax

Rules of section 54 and 54F

  1. Condition (i):The investor/seller ought to use the funds from financial gain to get a replacement residential house within 1 year before or 2 years (sale/transfer of the initial property).
  2. Condition (ii):If the capitalist intends to speculate their cash in under-construction residential property or construct their own residential property, the development must be completed within 3 years from the date of transfer of the initial property.
  3. Condition (iii):The capitalist should not own any house (other than the new house) on the date of sale or purchase. Or, should not construct any residential house (other than the new house) inside an amount of 3 years, once the sale date.
  4. Condition (iv):The investment in a very new residential property features a lock-in amount of 3 years.

If the new property is oversubscribed inside an amount of 3 years, the exemption claimed with reference to the previous property shall be revoked and therefore the financial gain becomes taxable.

  1. Condition (v): The most exemption cannot exceed the quantity of LTCG used for purchasing a replacement house. The quantity left of LTCG after finance in new property if any, is taxable at two-hundredths.
  2. Condition (vi):As per the union take into account FY 2014-15, for availing of the advantage of LTCG tax exemption, the investment ought to be created solely in 1 residential house.

Method 3: Capital Gains Bond under section 54EC

Features:

  1. Capital Gains Bond gives the exemption.
  2. The money invested in these bonds is also exempted from the capital gains tax.
  3. An annual interest rate of 6% is received that is less than the FD rates.
  4. Capital gains realized should be invested within 6 months of the date of transfer in eligible bonds.
  5. Such investment is held for 3 years and remains locked.
  6. To avail of capital gain exemption, the bonds cannot be transferred or converted into money; or any loan.
  7. Advance can be taken on security of such bond within 3 years from date of acquisition else, the benefit would be withdrawn.
  8. If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.
  9. The investment into the capital gains bond cannot go beyond Rs. 50 lakhs.
  10. You can also invest in capital gains bond of NHAI and REC through the designated branches of the banks.

These bonds are a good way to save capital gains tax but have its own limitations

Long Term Capital Gains Tax Exemption on Sale Of  Land/house

Section 54Section 54FSection 54EC
Who can claimIndividual/HUFIndividual/HUFAny person

Asset sold/transferred

Residential property

Land/plot ( other than residential house)

Any long term capital asset

Time period3 years3 years3 years

New asset to be acquired

Residential house

Residential house

Notified bonds

Time limit for new investment

Purchase: 1 yr or 2yr forward
Construction: 3 yrs forward

Purchase: 1 yr or 2yr forward
Construction: 3 yrs forward

Within 6 months

Exemption amount

Investment in the new asset or capital gain, whichever is lower.

Net consideration
(Long term capital gain* amount invested in the new house)

Investment in the new asset or capital gain, whichever is lower (max. Rs 50lakhs).

Method 4: Capital Gains Account Scheme (CGAS)

Capital Gains Account Scheme is abbreviated as CGAS and allows the individuals to safeguard long-term capital gains until they are able to invest it as specified in Sections 54 and 54F. You can put money for 3years in this scheme. During this period you can use the capital gains for purchasing or constructing a new residential house.

Under Section 54: Can invest the LTCG made from sales of an immovable property, in a residential property.

Under Section 54F: Can invest the LTCG from sale of shares and bonds, in a residential property.

Types of CGAS

CGAS Type A – Savings Account:                                                      save capital gains tax

It is similar to the regular savings account in any bank and interest rate is also the same. The amount deposited in this account will have high liquidity and can be withdrawn any time.

CGAS Type B – Term Deposit Account:

It is similar to the fixed deposit (FD) schemes of banks and the rate of interest; terms related to maturity remain the same. Type B account is suggested if the capital gains is in a lump sum amount.

  1. Constructing a house: 36 months (3 years)
  2. Buying a Furnished house: 24 months (2 years)

These account also offer cumulative and non-cumulative options.

Cumulative option: The interest amount is added to the term deposit and reinvested, thereby adding to the total interest accrued.

Non-Cumulative scheme: Allows withdrawing or receiving the interest at regular intervals – quarterly, half-yearly or annually.

Features:

  1. If you plan to buy a property after a year, choose account B.
  2. If you are planning to build a house soon and need money periodically, choose account A.
  3. Withdrawn money should be used within 2 months.
  4. The rate of interest is fixed periodically by the RBI.
  5. Money can be transferred from type A to type B and vice-versa.
  6. The interest on capital gains account is taxable and TDS is deducted as per provisions.

Method 5: Capital Loss Set Off

It is another way to save capital gains tax from the sale of property and also gives an opportunity to set off losses.                 save capital gains tax

Rules

  1. The capital loss should be of earlier date.
  2. Short term capital gains can be set off short term capital loss only. Similarly, for long term capital gains.
  3. Capital loss can be carry forward for 8 continuous years and ITR should be filed before the last date.
  4. Long term capital gains from shares, equity, mutual funds does not attract capital gains.

Conclusion

There are various ways provided by the government to save capital gains tax on sale of property. It is just a matter of awareness and pre-planning by considering these options.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.