Selling your house (or a residential flat) attracts capital gains tax. However, there are various provisions in the Income Tax Act that can reduce your tax liability or set off your capital gains.
You incur various expenses during the sale such as brokerage, stamp duty and registration fees. These can be deduced from the gains you have made on the house, thereby decreasing the tax you have to pay.
Long Term or Short Term?
The Budget 2017 reduced the holding period for claiming long-term capital gains tax to just two years from the earlier three years. The long-term capital gains tax (LTCG) is 20% and you can avail of indexation too. Selling the house before 24 months would attract short-term capital gains tax as per your tax slab rate.
In case of long-term capital gains tax, you also get the benefit of indexation. Indexation is a concept that takes inflation into account while computing your taxable gains and reduces your tax accordingly.
Indexed cost of acquisition = (Index value for the year of sale/index value for the year of purchase) * purchase cost of the property.
Say you purchased a property in 1997 for Rs 8 lakh and you sold it at the start of 2017 for Rs 38 lakh. Your capital gain will be computed as follows:
Indexed cost of acquisition = 1125/331 * 8 lakh = Rs 27.19 lakh.
Capital Gain = Rs 38 lakh – Rs 27.19 lakh = Rs 10.81 lakh.
You can get the cost inflation index from the Income Tax website here.
There are also two major deductions that you can avail of to further reduce the tax payable. Note that these deductions are only available for long-term capital gains tax.
You can invest up to Rs 50 lakh in the bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) and this amount will be exempted from capital gains tax. These bonds come with a lock-in period of three years and carry an interest rate of 5.25% (which is taxable). You must invest this amount in the bonds within 6 months of selling your old house.
You can invest the proceeds of the sale of your house into the purchase of a new house or construct a new house. This will give you a tax deduction equivalent to the amount of purchase.
1) You must complete the purchase within two years of the sale. Alternatively, if you have purchased the new house, up to one year before the sale of the old house, this will also be allowed as a deduction. In case of construction, you should construct the residential house within a period of three years from the date of transfer of the old house.
2) With effect from the assessment year, 2015-16, the exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then the exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India.
3) You must also transfer your sale proceeds to a capital gains exemption account before the due date of filing returns if you have not purchased the new house before that date.
Eg: If you have sold your old house on 1st Jan 2018 and have failed to purchase a new house by 31st July 2018, your tax filing due date, then the proceeds must be deposited in a capital gains exemption account (there are designated banks where you can open a capital gains account). If you fail to do so, you will not be able to claim the benefit of Section 54.
4) You must also refrain from selling the new house within three years of purchase. Otherwise, the tax benefit will be withdrawn.
5) This benefit is available only to an individual or HUF (Hindu Undivided family).
The buyer is required to deduct TDS at 1% of the sale consideration while buying a house where the transaction exceeds Rs 50 lakh. Thus if you sell your house for Rs 75 lakh, you will be paid Rs 74.25 lakh after deducting Rs 75,000 as TDS or Tax Deducted at Source.
The buyer has to deposit this amount with Income Tax Department within 7 days of deducting it, and also make the necessary filings for the same. Failure to do this can attract a penalty anywhere from Rs 10,000 to Rs 1 lakh apart from interest and late filing fee. The liability to deduct TDS is on the part of the buyer. As the seller, you can claim the TDS refund or adjustment to your tax liabilities when you file your returns.