There are certain precautions one should carefully take before selling or buying a house, if you do not wish to end up paying heavy taxes
Timing of your sale can make lot of difference to your taxes if you are reselling the house. If house is sold within 2 years of buying,it will be treated as short term capital gain and entire gain or profit (difference between sale price and cost price) will be added to your income and will taxed according to the slab applicable to you. If you are earning more than Rs 10 lakh it would mean 30% tax on the profit. It is therefore advisable to hold the house propertyfor at least2 years to claim benefit of concessional rate of tax at 20% on long term capital gains after indexation.
When one sells a house, income tax on profit is attracted.This is referred to as capital gains under Income Tax law. If the house is sold within 24 months of its acquiring, it will be short term capital gain otherwise it is long term. There are several ways to avoid paying tax on long term capital gains.This is not possible in case of short term capital gains. There will be no tax on long term gains if the entire gain from the transaction is invested to buy another house within 2 years or to construct another house within 3 years (under Section 54). Even if you bought another house within 12 months before selling the house, you will be eligible for exemption. If the entire capital gains are not invested, the balance amount is charged to tax as long-term capital gains.However, you will lose the entire exemption if the new property purchased to avail tax exemption is sold within 3 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 capital gains and will be charged to tax at thetax rates applicable to the slab of total income.
Incase you do not invest in a house, there is another way to claim exemption by investing long term capital gain in the bonds of National Authority of India and Rural Electrification Corporation Limited within 6 months of selling the house. The maximum amount you can invest is Rs 50 lakh in a financial year (under Section 54EC). There is also an option of investing entire long-term capital gain in certain specified startup companies without any limits (under Section 54GB).
This long-term capital gain can also be set off against brought forward long-term loss from earlier 8 years or from the current year. However, short-term capital gains can be set off only against any other short-term loss from sale any other assets such as gold jewellery, stocks or any other property.
Taxpayers are eligible for deduction from gross total income in case ofrepayment of principal amount of housing loan, stamp duty and registration charges upto Rs 1.5 lakh (under Section 80C). However, if the said house property is sold within 5 years of the end of the financial year in which it is purchased, the tax benefits availed will be reversed and additional tax will be applicable on such amount in the year of sale but claim for interest deduction will not be affected.
To avoid leakages in tax and better reporting, government has made it mandatory for the buyers to deduct tax at source at 1% on value of the property before making payment to the seller,if the price of the house exceeds Rs 50 lakh (under Section 194-IA). If seller is non-resident,buyer is required to deduct tax at 20.8% or31.20% as applicable, irrespective of the value of transaction (under Section 195). The TDS should be deposited in government treasury within 30 days from end of the month in which transaction was made in Form 26QB. There is no need for the buyer to obtain TAN in case of resident seller.These payments automatically get linked to sellers’ PAN number and is reflected in sellers’ form 26AS. Buyer is requiredto give TDS certificate in Form 16B to the seller.
It is therefore most essential and critical to keep eye on the calendar when you sell your house and get advice from your tax consultant before entering into the transaction.
