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April 23, 2020

How to save Income Tax on Capital Gain when you sale your residential property in India

by facelesscompliance in Income Tax

How to save Income Tax on Capital Gain when you sale your residential property in India

Capital gain is profit from sale of property or an investment made. As per section 45(1) of Income Tax Act, any profit and gain arising from transfer of a capital asset like Shares or Property shall be chargeable under the head capital gain in the previous year in which transfer took place. In simple words the profit earned (Sale Price – Purchase Price) on sale of capital asset is taxable under the income tax act. However there are various provisions in Income Tax Act which helps you to save Long Term Capital Gains in case of Sale of Resident Property in India

What is capital asset as per Income Tax Act?

Capital asset means property of any kind held by assessee, whether or not related to business or profession. Any securities held by a Foreign Institutional Investor (FII) but capital asset does not include:

  1. Stock in trade
  2. Movable personal property (used by assessee or his dependent family member for personal purpose) excluding Jewellery, Drawings, Paintings, Sculpture, Archaeological Collection or any work of art
  3. Rural agricultural land in India
  4. Gold deposit bond, 1999 or Deposit Certificates issued under the Gold monetization scheme, 2015.

Capital Asset will Include Resident Property, Commercial Property, Land & Building any other assets which are not exempt as per above list

How to save capital gain on residential property?

As per income tax in case the assessee makes investment in assets prescribed by the income tax act then such assessee shall get exemption from capital gain to the extent allowed by such provision. The capital gain on sale of residential property can be saved through investment in other capital asset following measures

Option 1 Purchase of residential house property (Section 54)

As per section 54, when an individual sells a residential property and buys another residential house property being building or land appurtenant there to then he will be eligible for exemption for the amount of capital gains arising out of such transfer for the limit prescribed under section 54.

What are the conditions for claiming this exemption in Section 54?

The following are the conditions for claiming exemption u/s 54 is as follows:

  1. The assessee who is transferring the residential property must be an Individual or HUF
  2. The residential property sold by the assessee must be a Long-term capital asset i.e. it must be held by the assessee for more than 2 years ( From April 2019 onwards)
  3. The assessee must purchase the new residential house property within 1 year before or 2 year after the date of transfer. In case of construction the new property must be constructed within 3 years after the date of transfer. If the assessee does so than the exempt capital gains shall be taxable in the hands of assessee in the year where such transfer or sale takes place.
  4. The assessee has option to purchase two house property in case the capital gain is less than 2 crores. This option can be exercised by the assessee only once in a life time (amendment Finance Act 2019)
  5. The assessee cannot sell the new house property within 3 years from the date of purchase or construction.

What is the amount of exemption under section 54?

The amount of exemption under section 54 shall be higher of Capital gains or Cost of new asset. The assessee will get the exemption for the agreement value of the asset.

Option 2 Purchase of government bonds (Section 54EC)

As per section 54EC, when an individual sells a residential property and buys notified governments bonds then he will be eligible for exemption for the amount of capital gains arising out of such transfer for the limit prescribed under section 54EC.

What are the conditions for claiming this exemption in Section 54EC?

The following are the conditions for claiming exemption u/s 54EC is as follows:

  1. The residential property sold by the assessee must be a Long-term capital asset i.e. it must be held by the assessee for more than 2 years.
  2. The assessee must purchase the government bonds within 6 months from the date of transfer of the original asset
  3. The assessee cannot transfer the bonds or convert it into money within 5 years from the date of acquisition. If the assessee does so than the exempt capital gains shall be taxable in the hands of assessee in the year where such transfer or conversion takes place.

What is the amount of exemption under section 54EC?

The amount of exemption under section 54EC shall be higher of Capital gains or Cost of new asset i.e. Maximum Rs. 50 Lakhs. The assessee will get the exemption for the agreement value of the asset.

What are the bonds notified by the government?

The government till date has notified the following government bonds eligible for claiming exemption under section 54EC:

  1. National Highway authority of India ltd
  2. Rural electrification corporation ltd
  3. Indian Railway Finance corporation ltd
  4. Power finance corporation ltd

Rate of tax on Long term capital gain:

Long term capital gain shall be chargeable to tax at the rate of 20%. The tax shall be further increased by 4% Health and Education cess.

Let us Understand with 2 Examples

Example 1 : Mr. X sold a residential house property on 16/01/2020 for Rs. 3 crores, the house property was purchased on 31/07/2007 for Rs. 46 lakhs, the said transaction she earned a Long-term capital gain. Later, he invested a sum of Rs. 55,00,000 in bonds of RECL on 04/04/2020. Further he invested in new residential house property for Rs. 1.4 Crore. Calculation of the amount of taxable Long-term capital gains or loss is below

The indexation cost for 2007-08 and 2019-20 is 129 and 289 respectively

Computation of capital gain:

ParticularsAmount
 Full Value of Consideration30,000,000
Less:Transfer Charges 
 Net Consideration30,000,000
Less:Indexation Cost of Asset10,305,426
Less:Indexation cost of improvement
 Long term Capital Gains19,694,574
Less:Exempt u/s 54- Investment in new property14,000,000
 Exempt u/s 54EC- Maximum Rs. 50 Lakhs50,00,000
 Taxable Long term capital gains6,94,574
 Tax on above @ 20%1,38,915
 Health and Education Cess @ 4%5,557
 Total tax liability1,44,471

Note: Mr. X can get deduction under Section 54EC for Maximum Rs. 50 lakhs

Example 2 : Mr. X sold a residential house property on 16/01/2020 for Rs. 3 crores, the house property was purchased on 31/07/2007 for Rs. 46 lakhs, the said transaction she earned a Long-term capital gain. Later, he invested a sum of Rs. 20,00,000 in bonds of RECL on 04/04/2020. Further he invested in two new residential house property for Rs. 1 Crore and Rs. 75 Lakhs respectively. Calculate the amount of taxable Long-term capital gains:

The indexation cost for 2007-08 and 2019-20 is 129 and 289 respectively

Computation of capital gain:

ParticularsAmount
 Full Value of Consideration30,000,000
Less:Transfer Charges 
 Net Consideration30,000,000
Less:Indexation Cost of Asset10,305,426
Less:Indexation cost of improvement
 Long term Capital Gains19,694,574
Less:Exempt u/s 54- Investment in new property17,500,000
 Exempt u/s 54EC- Maximum Rs. 50 Lakhs20,00,000
 Taxable Long term capital gains1,94,574
 Tax on above @ 20%38,915
       Health and Education Cess @ 4%1,557
 Total tax liability40,471

Note: As per section 54, Mr. X has option to purchase two house property as the capital gain is less than 2 crores. This option can be exercised by Mr. X only once in a life time.