Income Tax on House Sale: If you are selling your old house then you must be aware of these rules of income tax…
Many people invest in real estate. For such people, residential property i.e. house proves to be a good option. Many times people buy a smaller house first. Later they sell it and buy a new house.
If you are also planning to sell your old house for some reason, then you must know that the money received from selling the house is not out of the ambit of tax. This means that you may have tax liability on that money also. Let us understand this whole matter.
The profit made from selling a house is considered capital gain and is taxed in two ways. If the house is sold after owning it for 2 years or more, it will be considered as long term capital gain. Capital gain amount will be taxed at 20 percent after indexation benefit. At the same time, the profit made by selling the house before 24 months will be considered as short term capital gain. This profit will be added to the regular income of the person and tax will have to be paid as per the tax slab.
When and how can you save tax
Section 54 of the Income Tax Act provides relief from tax on buying another house from the income earned from selling the old house (capital gain). This benefit is available only in case of long term capital gain. Income Tax law believes that in such cases the objective of the seller is not to earn money by selling the house but to find a suitable home for himself.
What kind of property will you get tax exemption on buying?
Section 54 of the Income Tax Act makes it clear that capital gains should be used only for purchasing or constructing residential property. This means that tax exemption will not be available on purchasing commercial property. In case of land, exemption equal to capital gains tax can be claimed on purchasing a plot of land and constructing a house on it. Tax exemption will not be available only on purchasing land.
How long will it take to buy residential property?
Under Section 54, to avail tax exemption, a new house has to be purchased within 2 years from the date of transfer of the old property. Whereas, in case of construction, the house should be built within three years. If you buy a new house even a year before selling the old property, you can avail the discount.
Investing the long term capital gain on sale of residential property in another residential property provides tax exemption under Section 54. If two residential properties are purchased or constructed from the profits of one property, then exemption can be availed on only one property. However, there is an exception in this, two properties can be purchased only once in a lifetime with the capital gain from property, provided the capital gain is not more than Rs 2 crore.
Why deposit capital gains in CGAS account?
If you want to buy a house and are not able to utilize the capital gain money by the date of filing ITR, then you will have to deposit that money in the bank under the Capital Gain Account Scheme (CGAS). If you do not do so, you will have to pay tax. The thing to keep in mind here is that despite keeping money in the capital gains account, you will have to buy a residential property within two years or get it constructed within 3 years, otherwise you will have to pay long term capital tax on completion of the prescribed period.
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