Want to Sell Your House? Know the Tax Implications!

The first budget proposed by the finance minister after the ascent of the new government at the center has had several changes in income tax laws with respect to capital gains accrued from the sale of property. The finance minister has capped the amount that can be saved from taxes through investment in capital gains of longer terms for sale of property in specific bonds, also termed as capital gains bonds. The finance minister has also specified that investment must be made on residential properties located in India for availing benefit of longer term capital gains.

According to current rules of income tax, capital gains in the long term accrued from property held for 3 years attracts 20% tax. Exemptions have been granted under specific conditions. However, some of the changes proposed for income tax laws seek to overturn a couple of these laws. Some of the changes proposed are as following.

Exemption of capital gains tax on housing property

According to current tax provisions, longer term capital gains that come about from a capital asset’s sale is exempted under Section 54/54F in case it is invested in construction or purchase of housing property, subject to specific conditions. For gaining exemption on capital gains, an assesse must purchase a new house one year below or 2 years post transfer of the original house. For the properties under construction, the construction must be completed within 3 years from the transfer date of the original property.

The finance minister has clarified now that investment for availing benefit of capital gains must be in residential housing property located in India and not abroad. The amendment shall apply for the assessment year of 2015-16 and following years.

Availing exemption on long term capital gains by investing in bonds

A lot of investors who sell off properties, save taxes on longer term capital gains through investment of capital gains amount in specific bonds, also known as capital gains bonds. Tax payers who wish to claim these exemptions from longer term capital gains must invest the sum in capital gains bonds within 6 months from the sale date or prior to filing of income tax returns, whichever comes earlier. The benefit can be availed from Section 54EC of Income Tax Act of 1961 till a capping amount of Rs 50 lakhs in a particular financial year.

The ministry of finance has clarified now that total exemption with respect to long term capital gains for investing in capital gains bonds would be limited to Rs 50 lakhs. The amendment shall be applicable for the assessment year of 2015-16.

Advance acquired for property sale and its forfeiture

The finance minister has proposed to levy taxes on advances received and forfeited later by individuals for sales of capital assets such as flats in case the transaction falls through. If negotiations do not translate into capital asset transfers and money charged as advance is forfeited by an assesse, then the sum shall be taxed in the assessment year under “income from other sources”. Under current provisions, the amount may be reduced from acquisition cost of an asset subsequently in the sale year of the capital asset when determining capital gains. This amendment shall also be applicable from 2015-16 and subsequent years.