In the current scenario, real estate has turn out to be an increasingly admired investment option. Through a steady boost in property prices attached with lackluster presentation of other investments like debt, gold, and equity, people are turning on real estate acting as the savior. Having a dream of possessing a home being comprehended early in life, buying of more than single property for the rationale of investment is getting ever more common. In last decade or even two, people have visualized a massive take- off in the real property division with the boost in incomes, easy accessibility of credit, corporization of builders & increased competition amongst them to woo their buyers.
Tax benefits play an important part in the decision in purchasing a property. Since the motive to hold a property is slowly shifting from self-occupying to investment, it’s important to know the tax allegations with respect to the selling of property for generating gains.
Understanding Capital Gains
Property is look upon as a capital benefit and any gains occurring from the property sale is assessed in head of ‘Capital Gains’ as said in the Income Tax Act. The property can take a shape of long -term capital benefit or short-term capital assets that depends on the period till which it is in custody. If property is hold for less than 3 yrs. prior to its trade, it is named as short-term asset & any gain occurring from the trade is treated as short-term gain. There are none tax exemptions for these short-term gains and one requires paying tax on the gain on the word of the tax slab valid on the individual.
If property is traded after a holding time of more than 3 yrs., it is levied as long-term benefit & any gain arising through its sale is termed as long-term capital gain. Although short-term capital gains on sale of properties are taxable, there is certain exemption for long-term gain on the sale of property.
It is vital to know how capital gains are computed on property sale. To calculate short-term capital gain, the cost of purchase and cost of improvement (alterations or additions to existing property) both are deducted from the value of sales. In order to calculate long-term capital gain, the index cost of acquisition & index cost of improvement is deducted from the sale value.
Exemptions from tax
There’re certain supplies in Income Tax Act which provides exemptions from long-term gains. Sec. 54 provides exemptions from tax to those, on capital gain rousing from the sale or transfer of house if following conditions are fulfilled:
a. The asset sold or transferred is a house & is a long-termed capital asset (in custody for more than 3 yrs).
b. The capital gain must be put in the buying of another home either one yr before or within 2 yrs. from the day of transfer, or in use for constructing a house within 3 yrs of the day of transfer.
c. The latest property constructed or purchased shouldn’t be transferred within 3 yrs. from the date of purchase.
If these situations are fulfilled, exempting from long-term gains can be claimed at the time of paying tax to the point of cost of construction or purchase or capital gain, whatever is lower.
Even though under Section 54, time period of 2 or 3 yrs. for construction or purchase of property is specified, the capital gain shall become able for tax in the yr. in which the transfer or sale took place. Because it may be not easy for a person to take decision on construction or purchase before handing over income tax return of that year, he could still gain the exemption by giving the whole capital gain under the Capital Gains Acc. Scheme. The evidence of such deposits can be attached next to the return to claiming exemption. This account could be open with any certified bank & the money deposited must be used in a specified period.
If a person doesn’t want to get hold of property & yet wants to accumulate capital gains tax, then Section 54EC is there to save. As per the section, any gain raised from the transferring of a capital asset that is long-term (& which includes property) will be exempted if the gains were invested in a time period of 6 mths in specified investments only. On the other hand, there is a constraint that the sum invested cannot surpass Rs 50 lakh within any financial year. And if the exemption(s) aren’t availed, long-term gains tax would be paid at a concessional rate of twenty percent.
Although one shouldn’t make property investments to save tax only, it is vital to be aware of the tax implication of property related conclusions. Claiming the exemptions properly can save considerable sum of tax on sale transactions of property.