When you makea gain on the sale of a house, you have to pay a tax on your gains. If threeyears have passed between the date of purchase and sale of the house, then,your gain from the sale will be classified as a long-term capital gain. Ifthree years have not elapsed, your gain will be treated as a short-term capitalgain. Long-term capital gain is taxed at the rate of 20%, while short-termcapital gain is taxed at your marginal tax rate.
You areentitled to avail of indexation benefit on long-termcapital gains. If you bought aproperty in 1994-95 at Rs 20 lakhs and sold it in 2015-16 for Rs 1 crore, yourlong-term capital gain will not be Rs 80 lakh. Instead, it will be calculatedas follows:
Capital gain =Selling price – Indexed cost of acquisition.
Indexed costof acquisition = Purchase price x (Index in year of sale/Index in year ofpurchase).
Now, the indexin 1994-95 stood at 259 and in 2015-16 at 1,081.
Hence, yourindexed cost of acquisition will be = 20 x (1081/259) = 83.48
Your long-termcapital gain will be = 100 – 83.48 = 16.52 lakh.
Reinvesting in aproperty
Under Section54 of the Income Tax Act, you don’t have to pay any tax on long-term capitalgains, if you invest your gain in another property. However, there are a fewpreconditions. Firstly, this benefit is available only to an individual or anHUF (Hindu United Family). Secondly, your gain must be invested in another residential property and not in some other asset. Thirdly,you must invest in the second property, either one year before or within twoyears of the sale of the first property. If you are constructing a new house,its construction must be completed within three years from the date of sale ofthe first property. Lastly, the government has now restricted this exemption toonly one residential property.
If you availof the benefit under Section 54, you can’t sell the second house within threeyears from the date of its purchase or from the date of completion of itsconstruction. “If you sell the house in less than three years, then, the amountclaimed as exemption under Section 54 will be deducted from the cost ofacquisition of the new house.
If, till thedate of filing one’s income tax return, the capital gain is not utilized topurchase or construct another house, then, you must deposit the unutilizedamount in a Capital Gains Deposit Account in any public sector bank. The newhouse can be purchased or constructed, by withdrawing the amount from thisaccount within the specified time limit.
Invest inspecified bonds
Section54EC also provides for exemption on capital gains tax, if the amount isinvested in the bonds of Rural Electrification Corporation (REC) or theNational Highways Authority of India (NHAI). The investment must be made withinsix months of sale of the property. One can invest up to Rs 50 lakhs in thesebonds, which have tenure of three years.