How to save tax on capital gain from selling of residential property

This topic pertains to common taxpayers, especially salaried individuals, who often buy and sell multiple residential properties as part of their investment strategy throughout their working lives.

In most cases, individuals selling residential properties end up with capital gains due to the appreciation in property value. Upon selling these properties, they become concerned about minimizing the capital gains tax incurred from the sale.

Hence, there are two sections of the Income Tax Act addressing this issue. The first is Section 54, which pertains to capital gains arising from the transfer of residential properties.

The conditions to avail benefits under Section 54 are as follows:

1. The property must be residential in nature, whether self-occupied or rented out.
2. The property must be held for the long term.

To benefit from Section 54:

1. The assessee must reinvest the capital gains in purchasing or constructing a new residential property (limited to one).
2. If purchasing a new property, the time limit is two years from the date of transfer; if constructing, it’s three years.
3. Alternatively, a house acquired within one year before the date of transfer can also qualify.
4. The new property must be located in India.
5. The new property must be held for a minimum of three years from the date of purchase or construction.

Now, the question arises: What if the assessee doesn’t wish to acquire another residential property solely to save on capital gains tax? The answer lies in Section 54 EC.

Section 54 EC stipulates that if an assessee transfers a long-term capital asset such as land or a building and reinvests the capital gains in specified bonds issued by:

1. National Highway Authority of India (NHAI); or
2. Rural Electrification Corporation Ltd. (REC)

Within six months from the date of transfer, then the capital gains invested in these bonds will be exempted from income tax. However, the maximum amount that can be invested in a year is Rs. 50 lakhs, and this invested amount cannot be transferred or converted into money within five years from the date of acquisition.

It’s evident that tax on capital gains can be minimized even without purchasing a new property. The assessee has both options available for saving on capital gains tax.

Author Bio: Name: CA DURGA SHANKAR

Qualification: CA in practice

Firm Name: S D AND ASSOCIATES