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Selling your own house and the capital gain arising from it is treated in a different manner and has its own tax implications as per Income Tax Act. Many of us are unaware as to how it should be treated and finally we end up paying taxes on the gains which was previously exempted.
As per Income Tax Act, tax benefits on principal repaid amount and interest paid towards the home loan gets reversed if, the house is being sold within 3 years of buying it. It will be added with your income while filing your tax return. Besides this, selling of your house with in 5 years of the completion of the financial year in which it was purchased will also lead to adding up of all your deductions claimed U/S 80C in your taxable income in the year of sale.
Treatment of capital gain arising out of sale of house property
Profit arising from the sale of real estate is assessed under the head, capital gain. Any property sold within 3 years of buying it is considered as short term capital gain and is added to your total income and taxed as per slab rates applicable. However, property sold after 3 years is considered as long term capital gain and taxed at 20% after indexation.
Various tax benefits are available in case of long term capital gains in comparison to short term capital gains. Indexation is one such benefit associated with long term capital gain. Through indexation the seller is able to escalate the value of the property. It’s actually inflation adjusted cost of the property. The indexed purchase price is determined as, purchase price*(CII for the year of sale/ CII for the year of purchase). Where CII is cost inflation index as is revealed by the Central Government for each financial year.
How to reduce your tax burden?
Section 54 grants tax exemption on long term capital gains arising from the sale of house. For this, you must use the whole profit generated from sale of the house to either purchase another house within a span of 2 years or construct one within 3 years.
If you have purchased another house within 1 year without selling the first one, still you can avail tax exemption. However, if you sell the newly acquired property within 3 years of its purchase/construction then, the capital gain exemption availed will be reverted back. The profit will be considered as short-term gain and taxed as per tax rates applicable without indexation.
As per Sec54 (F), one can avail tax exemption on long term capital gain made from the sale of any asset except a house. The profit should be invested only in residential property. Section 54(EC) allows tax benefits if the proceeds from the long term capital gain is invested for 3 years in the bonds of National Authority of India and Rural Electrification Corporation Limited with in span of 6 months of selling the house , with a maximum of Rs. 50lakhs in a financial year.
The sale proceeds will be determined as per the valuation accepted by State Stamp’s Duty and Registration Authority.
Many a times it may happen that the required investment is not made before due date of filing the tax. Under such a scenario, the capital gain amount has to be deposited in a separate account in a nationalized bank under Capital Gain Account Scheme before the due date of filing your return for that year. The proof of such deposit can be attached while filing return.
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