Doing business in real estate sector is very speculative. With the sole motive of capital appreciation, these days, sale and purchase of the house property has become risky as there is a scope of paying hefty tax out of the gain for those who are eager to sell and likely to pay the highest. When a property is sold, a certain amount of tax is paid out of the profit earned. The amount varies depending upon the term period of the sale. If the property is sold within a period of three years of acquisition, then Short-term capital gains tax (STCG) will be paid. While on the other hand, if the property is held for more than three years, the STCG turns into LTCG, i.e. Long-term capital gains tax. In the former case, the profits are combined with the income and then taxed on the Income Tax slab rate. In the latter scenario, the tax is levied at the rate of 20% plus surcharge and cess, after adjusting the gains for inflation.
It should be noted that as per the current tax provisions, if the long term capital gain is being invested in purchase of construction of a house property, then it is exempted under Section-54 of the Income Tax Act, subject to certain terms and conditions. One out of those conditions is that the seller needs to purchase the new residential house within a period of one year before or two years after the transfer of the original house. Those properties which are under construction, should be completed within a period of three years from the date of transfer of the original house. If a person sells an under-construction property after holding it for over three years, the taxation rules completely get changed. The reason is that the I-T department considers the person as a property owner only when he or she has its possession.
If the property is being inherited or gifted, then the capital gain will be computed on the basis of the cost to the previous owner. If the house has been purchased before April 1, 1981, the income tax department will consider the acquisition cost by the original owner or the true market value of the property as on April 1, 1981, whichever is higher. The amendment that the investment for earning capital gains benefit should be made out of the residential house property situated only in India, not abroad, will apply in relation to the assessment year 2015-16 and subsequent years.
Exemptions Under Income Tax Act, 1961
To aid the tax payers in saving tax on their capital gains, the income tax provides for exemptions under Section-54 and Section- 54F, respectively. Both the exemptions are provided for long term capital gain but there is further categorization of the same.
- Under Section-54 an exemption is available on long term capital gain on sale of a house Property. To claim full exemption under this particular section, the entire capital gains has to be invested, and if it is not done entirely, then tax will be levied on the amount not invested as ‘long term capital gain’. Further, this exemption will be reversed if the novel property is sold within a period of three years of purchase and capital gains from sale of such original property will be taxed as short term capital gains.
- Under Section- 54F is available on long term capital gain on sale of any other asset than a house property. In order to claim full exemption, the entire capital gain needs to be invested, and if not done, the exemption will be allowed proportionally. It is to be noted that one should not own more than one residential house while selling off the original asset. Under this section, if the new property is sold within a period of three years of its purchase or construction, or if another residential house is being purchased within a period of two years of the sale of the original asset or build a residential house other than the new house within a period of three years of sale of the original asset, then the exemption will reverse.
The cost of the new residential property is worth considering as if the cost is lesser than the total sale amount, then proportionally the exemption would be allowed. And as far as the remaining amount is concerned, one can reinvest the money under Section- 54 EC of the Act, within a period of 6 months. Another important point to be noted is that the property must be bought in the name of the seller only.. And the exemption will be allowed in those cases also where the builder of a newly constructed residential property fails to hand over the property to the tax payer within a period of three years of purchase.