You have bought a house 2 years ago, which you badly want to sell. Your friend is offering you a good deal. Everything seems fine, except there is a small problem. According to current tax laws, if you sell a house/property within 3 years of buying, your profit/gain is called short term capital gains popularly known as STCG. Short term capital gains are added to your income and taxed, depending on which income tax slab you fall under. This is a lot of money in tax. You have to think twice, before selling your house.
Is there a way of escape? Yes, you need to stay invested in your house/property for at least 3 years and then sell. Your profit/gains are now called long term capital gains popularly known as LTCG. Long term capital gains are taxed at 20% after indexation. This is a lot less in tax. The Finance Minister, Arun Jaitley has proposed a new change where the sale of a house/property can qualify for LTCG benefit after just 2 years. This is good news indeed. Let’s read more about this.
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If you sell a house/property within 3 years, the profits are called short term capital gains or STCG. These profits are added to your taxable income and taxed as per the income tax slab you fall under.
You have an income above INR 10 Lakhs and fall in the 30% tax bracket. You have sold your property within 3 years of purchase and made a profit of INR 20 Lakhs. You have to pay a tax of 30% on your profit, which is INR 6 Lakhs. This does not include surcharge and cess.
If you sell a house/property after 3 years, the profits are called long term capital gains or LTCG. LTCG is taxed at 20% after indexation. Indexation takes inflation into account for the time you stayed invested in the house/property and then adjusts the purchase price of the house. A higher purchase price means you pay lesser taxes.
There are other exemptions you can claim while paying LTCG. You can add the repair and renovation expenses of your house to the cost of acquisition and then compute long term capital gains.
There are several ways you can avoid paying long term capital gains tax when you sell your house. If you use the entire gain/profit you make from selling your house, to buy another house/property within 2 years, you don’t have to pay any tax. You can also invest your entire gains to construct another house within 2 years of the sale. These rules apply even if you had bought a house/property, a year before selling the first house.
What happens if you don’t want to invest your gains in another house? You can invest your long term capital gains, within 6 months of selling your house, in bonds of NHAI and REC and claim an exemption under Section 54EC. You can invest only up to INR 50 Lakhs in a financial year in these bonds.
Clearly there are a lot of benefits if you sell your house/ property after 3 years and your profits become long term capital gains.
The Finance Minister Arun Jaitley, has proposed that the holding period of a property for qualifying as long term capital gains will get reduced to 2 years, currently set at 3 years.
You will be able to enjoy long term capital gains tax benefits after just 2 years of selling your property. This would be really great news. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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