It’s critical to keep an eye on the calendar when you sell your house. If you don’t time it well, you could end up paying a hefty tax
. If a property is sold within three years of buying (acquiring) it, any profit from the transaction is treated as a short-term capital gain in the hands of the individual. This is added to the total income of the owner and taxed according to the slab rate applicable to him. For those earning over Rs 10 lakh a year, this shaves off 30% of the profits from the sale consideration.
Also, if a house property is sold within five years of the end of the financial year in which it was purchased, the tax benefits claimed go out of the window i.e. tax benefits which were claimed earlier will have to be reversed. The tax deduction claimed for the principal repayment, stamp duty and registration under Sec 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction of the interest payment under Section 24B is left untouched.
This is why, from the tax point of view, it is advisable to hold a property for at least three years. If you sell a property after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation. Indexation takes into account the inflation during the holding period and accordingly adjusts the purchase price, thereby slashing the tax burden for the seller. There are other benefits too. The owner can claim various exemptions in case of long-term capital gains, but no such benefit is provided for short-term gains.
“Expenses incurred on repairs and renovation can be added to the cost of acquisition of the house while computing long-term capital gains. Also, the interest paid during the pre-construction period of the house can be added to the cost, if not already claimed as a deduction earlier,” points out Vaibhav Sankla, Director, H&R Block India.
How to avoid tax
There are several ways to avoid paying tax when you sell a house. There is no tax to be paid on the gains, if you use the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if you bought another house a year before selling the first one. But the property should have been bought in the name of the seller.
In case the entire capital gains are not invested, the balance amount is charged to longterm capital gains tax. However, the entire tax exemption will be reversed if the new property is sold within three years of purchase or construction. In such a case, the entire capital gains from the sale of the previous house will be considered as short-term gains and taxed at the normal slab rates.
If you are not keen to lock-in your gains from sale of the house in another property, there is another way out. You can claim exemption under Section 54 (EC) by investing the long-term capital gains for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house. However, one can invest only up to Rs 50 lakh in these bonds in a financial year.
From the current financial year, sellers also have the option of investing the entire longterm capital gain in a technology driven start-up (certified by the Inter-Ministerial Board of Certification) to get relief from tax. The investment in computers and software for your start-up will be allowed to claim exemption of tax on sale of house held for at least three years.
Apart from this, sellers also have the option to set off the long term capital gains from sale of the house against any long-term loss from the sale of other assets. These can be losses carried forward over the past eight years or even those incurred in the same year. However, to avoid tax on short-term capital gains, the only way out is to set it off against any short-term loss from the sale of other assets such as stocks, gold or another property.
Dealing with TDS
To plug tax leaks, the government has now made it mandatory for buyers to deduct TDS when they buy a house worth over Rs 50 lakh. TDS of 1% of the value of the property has to be deducted before making the payment to the seller. “Make sure that the buyer deposits the amount with the tax authorities on your behalf so that you can claim credit for the payment,” asserts Sankla.
Till last month, this amount was required to be deposited within seven days from the end of the month in which the sale transaction was done. But from 1 June, the period has been extended to 30 days. Since this payment is made on behalf of the seller and linked to the seller’s PAN, it is reflected on the seller’s Form 26AS under the head ‘Part F’, usually within seven days. The seller must also obtain a TDS certificate in Form 16B from the buyer.
The seller can claim a refund of the TDS if he is incurring a loss on the sale of the house or if he is claiming exemption from long-term capital gains under any of the ways mentioned earlier. To claim the refund, he should provide details of investment of the capital gains in his tax return. Else, he can also obtain a certificate from the assessing officer specifying that no TDS must be deducted on payments made to him and present this certificate to the buyer.
Tax tips for house sellers
1. If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately. For the remaining amount, you can reinvest the money under Section 54EC within 6 months.
2. The exemption is still allowed even if the builder of the new residential construction fails to hand over the property to the taxpayer within three years of purchase.
3. The capital gains will be calculated on the basis of the valuation adopted by the state’s stamp duty and registration authority. The tax department may object if the actual sale value is lower than the valuation of the property by the state authority.
4. If you are unable to reinvest the gains in another house or bonds before filing your tax return for the year in which the sale took place, deposit the balance in the Capital Gains Account Scheme so that you are eligible for the deduction.
How indexation cuts tax
If a house was bought for Rs 30 lakh and sold for Rs 75 lakh five years later, 20% tax on Rs 40 lakh gain is Rs 8 lakh. But indexation and other benefits will reduce the tax to Rs 3.47 lakh. Here’s how it works.
House bought in 2009-10 Rs 30,00,000 Cost of adding a room in 2012-13 Rs 5,00,000 Indexed cost of acquisition Rs 51,31,329 Indexed cost of adding room Rs 6,34,390 Total cost of acquisition Rs 57,65,719 House sold in 2015-16 Rs 75,00,000 Long-term capital-gains Rs 17,34,281
Tax at 20% after indexation Rs 3,46,856