Sold a house or flat lately? Hope you’ve calculated the payable tax correctly on your profits?
A year back, Col AK Nijhawan (retd) sold his Noida flat which he had acquired in 2002. In spite of the current real estate market conditions, where the prices haven’t moved for years now, he still got a fairly decent profit on it. He was happy because this money was going to meet the expenses of his daughter’s higher education abroad and his son’s marriage due shortly. The family too felt relieved that the sale of flat helped them do what they had actually planned for years.
And then came the rude shock – an Income Tax notice asking them the details of tax paid on this big transaction was received! And if no tax had been paid, then the tax with late penalty of about Rs 11.5 Lakhs was required to be paid within the next 15 days.
Col Nijhawan, in his exuberance of disposing off the flat, never even thought of the tax to be paid and had already used up all the money got from the sale of the flat.
Is this a unique, isolated incident? No.
We come across many such incidents regularly and the family is put to a lot of inconvenience, anxiety and financial hardships due to lack of awareness about this important issue.
What is this tax when you sell a residential house?
When you sell your residential property that is owned by you for more than two years, any gain arising from such a sale is called long-term capital gain (LTCG). If the period of holding is less than two years, it is called short-term capital gain (STCG).
In case of STCG, the sale price (less brokerage etc) minus the cost of purchase (cost of flat + registration charges + brokerage + stamp duty) is your profit. It is added to your total income for the year and taxed as per your tax slab.
In case of LTCG, the procedure is slightly lengthier but could give you a lot of tax saving. LTCG is calculated as the difference between net sales consideration and ‘indexed’ cost of property.
‘Indexation’ is the process which takes into account the inflation (महंगाई) while calculating the actual gains you have got. Eg, the Govt says that if you bought something for Rs 100 in 2001, then the value of those Rs 100 is really Rs 317 now.
So, if you sold that item for say, Rs 500, then your ‘real’ profit is Rs 500 – 317 = Rs 183 and not 500 – 100 = 400. The tax then to be paid is on Rs 183 and not Rs 400. Thus, LTCG can save a lot of tax for you.
Options with you to save this LTCG Tax
This aspect gets covered under Income Tax Section 54 (Section 54(f) for plots and others, ie those which are not residential house or flat).
Under Section 54, any LTCG arising to an individual or HUF, from the sale of a residential property (whether self-occupied or on rent) shall be exempt to the extent such capital gains (not the full amount but only the calculated gains part) is invested in:
- Purchase of another residential property within 1 year before (previous) or 2 years after the transfer of property sold from the owner, and/or
- Construction of residential house property within a period of 3 years from the date of such transfer of property; provided that the new residential house property so purchased or constructed is not transferred within a period of 3 years from the date of acquisition and/or
- Investing the LTCG into buying Capital Gains bonds (maximum up to Rs 50 lacs) under IT Section 54EC issued by authorized agencies within Six months of such property transfer.
There are also some other rules like depositing the amount of capital gain not utilized by the assessee for the purchase or construction of the new house before the date of furnishing of the ITR under the capital gains account scheme. Please properly research other relevant details before taking a final decision.
Key points to remember:
- Current Long Term Capital Gains tax rate is 20%.
- You are allowed to adjust your purchase and sale consideration for any brokerage, commission, registration charges, and stamp duty that you paid at the time of property sale.
- You are allowed to deduct any expenditure on any brokerage, commission, registration charges and stamp duty, construction, and home improvement of permanent nature incurred during the period you held the asset. This expenditure is also allowed to be adjusted as per the Cost Inflation Index (CII) published by Reserve Bank of India.
- Any LTCG amount balance after taking care of property investment and/or 54EC bonds will be taxed with indexation.
- You can choose a combination of property purchase, and/or, 54EC bonds, and/or, paying tax as suitable to you but each option or combination of options will have its own timelines for action too. Do not slip up on that.
- Sometimes it may be more advantageous to simply pay the tax than buying property (since there has been no appreciation in property for years now and nor is it visualized for some more years to come) or get into the 5-year lock-in of 54EC bonds at the taxable low-interest rate.
Illustration: Col SK Singh sold his property in January 2016 at Rs 50 Lakh, which he had purchased in December 2011 at Rs 30,00,000. As per his income, he falls in the 30% tax rate slab. He spent around Rs 2 Lakh on house improvement in January 2013 and also paid a brokerage of 0.5% of the sale price of the house at the time of selling the house. What will be his taxable Capital Gains and what is the tax amount payable by him?
Solution: In the above illustration, the buyer held the property for more than two years and hence, the gain earned on selling this property will be considered as LTCG which will be taxed at the rate of 20% after indexation. Calculations for this transaction are as below:
|Sale price of the house||50,00,000|
|Less: Any transfer expenses such as brokerage, commission etc.||25,000|
|Net Sale Consideration||49,75,000|
|Less: Indexed acquisition cost of the house:
(Purchase Price in FY2011-12 adjusted to FY2015-16 Cost Index) i.e. Rs 30 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2011-12 (184)
|Less: Indexed house improvement costs ( Home Improvement Expenditure in FY2012-13 adjusted to FY2015-16 Cost Index) i.e. Rs 2 Lakh * Cost Index of FY2015-16 (254)/Cost Index of FY2012-13 (200)||2,54,000|
|Long Term Capital Gain (LTCG)||5,79,696|
(Contributed by Team Vikrant of Hum Fauji Initiatives)