Safe Harbour. Save tax on your house sale

Planning to sell your residential house for a neat profit? Great, but make sure you know the tax implications to get the most from the deal.

For one, it’s a good idea to hold on to the property for at least three years. If you are selling the property within three years of buying it, the taxman gives you no quarter – the capital gain on the sale is considered ‘short-term’ and you have to pay tax on the entire profit in accordance with your tax slab. But if you have held the property for more than three years, the capital gain becomes ‘long-term’ on which there’s a lot of scope to save tax.

For starters, long-term capital gains on property attract lower tax – 20 per cent with indexation benefit. Say, you bought a house in 2004 for ₹35 lakh, incurred an improvement cost of ₹5 lakh that year and sold it in 2014 for ₹1 crore, thus making a capital gain of ₹60 lakh.

Now, the tax amount is not about ₹12 lakh (20 per cent of ₹60 lakh); rather it’s much lower at about ₹3.9 lakh. Here’s why. Using the cost inflation indices published by the Government every year, the purchase and improvement cost of ₹40 lakh is marked up to ₹81.12 lakh (₹40 lakh * 939/463). This is done to account for inflation between 2004 and 2014. On the resultant long-term capital gain of about ₹19 lakh, the tax of 20 per cent applies; cess of 3 per cent on the tax is also chargeable.

But you can save on this tax too – by investing the long-term capital gain either in another residential house or in specified bonds. The tax break is limited to the amount of capital gains you invest. So, deploy the entire gains to avoid the tax fully. Here’s how.

One, buy another residential house within one year before the sale or do so within two years after the sale. If you are constructing a house, you get three years after the sale to deploy the capital gains amount.

Again, hold on to the new property for at least three years to retain the tax break. The recent Budget says that the amount can be re-invested in only one residential house in India. So you cannot be clever and spread the gain over many properties. In case you are scouting around for another property and have not homed in on one yet, park the capital gains in a special Capital Gains Accounts Scheme account.

These accounts are provided by many banks. Deposit the funds in the special account before the due date of filing the tax return for the year in which the sale was made, or the gains become taxable.

Use the funds in the account to buy another property within two years or construct one within three years from the sale. Else, tax on the long-term capital gains postponed earlier will have to be paid after three years. You do get interest on the funds in the account, but have to pay tax on it.

If you don’t plan to go for another property, invest the gains in specified bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC).

You must invest in the bonds within six months from the sale of the property, and can deploy a maximum of ₹50 lakh. Until last year, by staggering the deployment in the bonds over two financial years, property sellers could invest capital gains of up to ₹1 crore (₹50 lakh each year).

The recent Budget has restricted the total amount you can invest in the bonds to ₹50 lakh, in both the year of asset sale and the next financial year. These bonds have a three-year tenure and an interest rate of 6 per cent (currently) paid annually.

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