For most people invest in real estate is a lifetime dream and it is fulfilled by savings of several years. Due to life necessities, sometimes these investments in real estate need to be liquidated, and if the holding period of the real estate investment has been long enough, there are chances that there could be significant capital gains in the transaction. The current write-up can serve as a guide for investors in real estate and could help them manage their capital gains tax liability more efficiently.
Real estate such as land/residential building is a capital asset and based on the appreciation in the value of the asset carries capital gains implications, there is one caveat though, agricultural land in a rural area is not considered as a capital asset hence its exempt from capital gains tax.
Based on the holding periods of the property one has to pay short term or long-term capital gain tax. When the property is held for 24 months or less (i.e. up to 2 years) profits from the sale of the property come under short-term capital gains (STCG) and if the property is held for more than 24 months, profits from the sale are considered as long-term capital gains. STCG is included in one’s taxable income and taxed at applicable tax rates based on one’s tax slab while LTCG is taxed at 20 per cent along with the benefit of indexation on acquisition cost.
Taxpayers can save the taxes on the gains by availing the benefit of tax exemptions allowed under various Indian tax laws. The following table summarizes all the exemptions that are available to an individual under various sections of the income tax; primarily the exemptions are available under Section 54, 54E, 54EA, 54EAB, 54EC
|Asset||Long Term Capital Gains on sale of property used for residence||Long Term Capital Gains on any asset transferred||Long Term Capital Gains on Land/building or both|
|Assesse||For Individual / HUF||Any Assesse||Any Assesse|
|Long Term Residential House Property||Any Long Term Capital Asset||Long Term Land/building or both|
|New Asset||Residential House||Specified securities – includes government securities, savings certificates, units of UTI, specified debentures, etc.||NHAI bonds or REC bonds, redeemable after 3 years|
|Time Limit for investment in new asset||Purchase – Within 1 year
Before or 2 years after
Transfer /Construction –
Within 3 years from transfer
|Within 6 months from the date of transfer||Within 6 months from the date of transfer|
|Amount of Exemption||Exemption Limit-Long-Term Capital Gain OR Cost of new asset whichever lesser||Cost of new asset x Capital Gain / Net consideration (maximum up to the capital gain)||Cost of new asset x Capital Gain / Net consideration (maximum up to the capital gain)|
|Capital Gains Account Scheme (CGAS)||Yes- Deposit the amount by return filing due date||No||No|
|Conditions||1. If a new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its cost of acquisition to calculate capital gains thereon
2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains.
|1. If a new asset is sold within 3 years, amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains
|1. If a new asset is sold within 3 years (5 years w.e.f. F.Y. 2018-19), amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon
2. If a loan is taken on the security of the new specified asset within 3/5 years, the same will be treated as capital gains
3. Investment in specified bonds should not exceed INR. 50 lakhs during the current and succeeding fiscal year
Example: Investment in New Real Estate Upon Exit From a Real Estate Property
Mr Rohit sells his residential house on 31st May 2019 for INR 49,00,000. Mr Rohit had bought the house for INR 23,00,000 on 19th December 2012. With the proceeds of the house, Mr Rohit purchases a new residential house for INR 55,00,000. The calculation of the capital gains and the exemption would be as below:
|Less: Indexed cost of acquisition (23,00,000*302/200)||3,473,000|
|Long Term Capital Gain||1,427,000|
|Investment in New Residential House||5,500,000|
The above exemption is now extended w.e.f 1 April 2019 to investment in 2 residential properties (once in a lifetime benefit), the one condition being that the gains are not above 2 crore rupees.
Example: Investment in real estate upon the sale of any other capital asset
Mr Vipn sells a plot of land on 10 May 2019 for INR 73,00,000. Mr Vipin had bought the land for INR 42,00,000 on 25th March 2014. With the proceeds of the land, Mr Vipin purchases a new residential house for INR 60,00,000. The calculation of the capital gains and the exemption would be as below:
|Less: Indexed cost of acquisition (42,00,000*280/220)||5,765,455|
|Long Term Capital Gain (A)||1,534,545|
|Investment in New Residential House (B)||6,000,000|
|LTCG Exemption u/s 54 (lower of A or B) 15,34,545*60,00,000/73,00,000||1,261,270|
Investment Period for New Property:
A taxpayer can acquire a residential house within a span of 2 years. A residential property which has been purchased a year before the sale would also qualify for an exemption. In the case of under construction properties, taxpayers have up to 3 years to complete the construction.
Deposit in Capital Gains Account Scheme:
Taxpayers who are unable to invest the proceeds/capital gains have the benefit of depositing the amount of gain/sale consideration in a Capital gains account scheme. The deposits have to be made with any branch of a public sector bank on or before the due date for furnishing of the income tax return of the year in which property was sold.
Taxation of the Unutilized Amount in the Capital Gains Account Scheme:
Taxpayers have to utilize the amounts deposited in the Capital gains account scheme. If they fail to utilize this amount within the specified time, they will have to pay tax on the gains, which were earlier exempted at the end of 3 years from the date of sale of the property/asset. Thus having a proper plan before selling your property can save you a lot in the form of LTCG exemption.
In summary, investors can avoid long term capital gain accrued due to sales consideration of an existing residential property by investing the proceeds in other residential properties or in some cases government approved tax saving assets within a specified amount of time, the maximum amount of capital gains that can be adjusted against the buying of a new residential property is INR 2 Crore, in addition these proceeds can be used to buy a maximum of two properties. Until an investor is able to find a suitable property the money received from sales proceeds can be deposited in a capital gains account.