K. Aravind
The tax is levied on income as well as capital gains from the sale of assets. Capital gains from the sale of houses, gold, stocks, mutual funds, etc. are liable to be taxed, but there are ways to avoid or reduce the tax liability. While it is not easy to save on short-term capital gains tax, there is a way to avoid long-term capital gains tax.
Short-term capital gains tax is applicable if the house is sold within 24 months of purchase. Short-term capital gains are taxable according to the tax slab plus income. If the annual income is above Rs.10 lakhs including capital gains, 30 per cent tax will be levied. If the sale is made after 24 months, long-term capital gains tax is applicable.
If the short-term capital gain is the difference between the purchase price and the selling price of the home, then the long-term capital gain is calculated according to the Cost of Inflation Index. According to the Cost of Inflation Index, the estimated capital gain is less than the difference between the purchase price and the selling price. According to this, only 20 per cent of the actual capital gain is taxable.
Long-term capital gains tax can be completely avoided by utilising the capital gain of up to Rs.2 crore from the sale of a house for the purchase or construction of two houses. The capital gains from the sale of one house earlier could only be deducted from the purchase of another house. This rule has been changed since the current financial year. This tax deduction is available only once in a lifetime.
If the long-term capital gains tax is to be completely eliminated, the entire capital gains from the sale of the home will need to be reinvested. If you do not invest in full, you will only get a partial tax deduction.
If the newly purchased home is sold within three years, the tax deduction will be forfeited. Profits from the new home will be subject to short-term capital gains tax.
The tax deduction is available only if you buy a new home within a year or two of selling the home. Or the new home must be built within three years of the home being sold. If you are unable to buy or build a new home within three years, you will receive a discount if you invest in a Capital Gains Accounts Scheme. This investment can be withdrawn later to buy a house within the stipulated time.
Even if you have taken a home loan to buy a new home, you can get a tax deduction if you use this amount to repay the home loan.
Section 84 of the Income-tax Act provides exemption for capital gains on reinvestment in real estate. According to Section 84EC of the Income Tax Act, tax deduction can be availed through investment means other than real estate.
There are other ways to get a tax deduction if you do not want to invest the capital gains from the sale of your home in real estate. Long-term capital gains on fixed bonds issued by the National Highway Authority or the Rural Electrification Corporation for a period of five years are tax deductible. This tax exemption is under Section 84EC of the Income Tax Act.
The tax deduction is available only if the capital gain from the sale of the house is invested in these bonds within six months. The maximum amount that can be invested in these bonds is Rs.50 lakh. The annual interest rate on these bonds is 5.75 per cent. Interest earned on bonds is subject to tax.
At the same time, you can get tax relief by investing in a new home under Section 54 and by investing in bonds under Section 54 EC.
Long-term capital gains from other assets such as gold, stocks, and mutual funds can also be tax deductible by investing in real estate. Gains above Rs.1 lakh on sale of shares or equity funds after one year of holding are considered as long-term capital gains. If the physical gold is sold after holding it for more than three years, it is considered a long-term capital gain. At the same time, if Gold ETFs and Gold Funds are sold after one year, it can be considered as a long-term capital gain.
You can also get a tax deduction for this type of capital gains if you use it to buy a home. This exemption is available under Section 54F of the Income Tax Act. It is not enough to just reinvest capital gains to get such a discount. Tax relief is available only if the entire amount is deposited.
