Know how to save tax on Sale of residential property

Last Updated On: Aug. 3, 2020, 9:27 p.m.


There is a certain provision in Income Tax,1961 to save tax on the sale of residential property. They know how to earn profits of the sale of residential property and pay tax but now they can save tax.

In this article, you will know how to save tax on the sale of Residential Property.

The profit which comes from the sale of the property is called a capital gain. When a property is sold after 24 months by holding then the profit will be called long term capital gain otherwise short term capital gain.

Exemption from tax is allowed only from long term capital gain. Long term capital gain is computed by deducting the indexed cost of the house from its net sale price. Deductions under section 80C, 80D, 80G, etc. are not available in respect of long term capital gain.

Applicable of Tax Rate:

Long term Capital Gain is taxable at a rate of 20%+surcharge ( it is applicable only if net income exceeds Rs.50 lakh) + 4% Health and Education cess. The amount of taxable income is computed after deducting various deductions.

Exemption Limit:

In case of Capital gain is no exemption limit. If taxable income minus long term capital gain is less than exemption limit then a resident individual or HUF can avail the benefit of exemption.

Methods of saving tax on the sale of residential property:

1. Section 54- By purchasing another residential house

Assessee can avail of this benefit by investing the capital gain amount in purchasing another residential property. If the taxpayer invests the whole amount of capital gain in purchasing the house then the entire amount of capital gain is exempt from tax.

This exemption can be availed when a house is purchased within a period of one year before the transfer or within 2 years after the date of transfer.

If the amount of capital gain is greater than the cost of the new house, the difference between the amount of capital gains and the cost of the new house is chargeable to tax as a capital gain.

The exemption also available in case of house construction         

Assessee can also claim an exemption on the construction of the house. Construction of the house should be completed within 3 years from the date of transfer. Construction may be commenced even before the transfer of the house. In the case of compulsory acquisition, the limit of 1 year, 2 years or 3 years is applicable from the date of receipt of compensation.

The house property so purchased or constructed has not been transferred within a period of 3 years from the date of purchase or construction.

Exemption available for one house only

This exemption is available only in respect of investment in one residential house in India. However, from the assessment year 2020-21, the assessee can invest in two houses and claim an exemption if the amount of capital gain does not exceed Rs. 2 crore Assessee can exercise this option only once in a lifetime.

Cost of the new house

The cost of the new house shall include the amount of the brokerage, stamp duty, registration charges, and transfer charges and the same will be eligible for claiming exemption under section 54 of the Income-tax act.

Capital gain deposit scheme

The assessee has to utilize the amount of taxable capital gain for buying a house or for construction before the due date of filing of an income tax return. If the assessee is not able to utilize the full amount of capital gain, the unused amount has to be deposited with a bank under the Capital Gains Accounts Scheme. The amount already utilized for purchase or construction of the new house together with the amount deposited in the bank shall be deemed to be the amount invested in new house for the purpose of the exemption.

The assessee should utilize the deposited amount for purchasing or construction of the new house within the time mentioned in the act. If the assessee fails to utilize the amount deposited in the bank within the time period, then such unutilized amount will be treated as long term capital gain and taxable.

Consequences in case if the new house is transferred within 3 years

If the new house is transferred within a period of 3 years from the date of its purchase or construction, the amount of capital gains arising, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of sale of the new house property.

2. Section 54EC- Investment in specified bonds:

The second option to save tax on long term capital gain is investing the capital gains in specified bonds. These bonds should be issued by the National Highway Authority of India (NHAI), Rural Electrification Corporation Limited (REC) etc.

Investment in bonds should be done within 6 months from the date of transfer of the house property.

Tenure of the specified bonds

The bonds have a tenure of five years. If the assessee transfers the bonds or converts into money or has taken any loan against such bonds within 5 years from the date of their acquisition then the amount of capital gain arising from the house property which was not charged to tax will be deemed to be the income of the previous year in which bonds are transferred etc.

Amount of Exemption

Amount of exemption under section 54EC is lower of the following two amounts:

  • Amount of capital gains generated on the transfer of house property
  • Amount invested in specified bonds
  • Assessee can invest a maximum of Rs. 50 lakh for any previous year in specified bonds.
  • Under section 80C the cost of the specified bonds is not eligible for deduction

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