A part of what you earn goes to the government as income tax when your total annual income falls under the tax slabs.
Similarly, if you profit by selling an asset like property after holding it for more than two years, then that income is also taxable. In this case, the profit is called long-term capital gain (LTCG), which is taxable at 20.8 per cent. However, certain exemptions will allow you to save on LTCG.
The 20.8 per cent LTCG tax on the sale of a property is allowed with indexation, which enables you to save some amount. Indexation is a method to adjust the cost of assets according to the inflation rates. When the gains from the sale of the property are adjusted against inflation, the tax liability goes down.
If you plan to sell an old house, you must keep certain things in mind to avoid paying taxes on your income arising from the sale.
- As per Section 54 of the Income Tax Act, one can avail of tax exemption on long-term capital gains if the proceeds from the sale of a housing property are invested in buying another house. But, there are certain conditions you must fulfil to get the LTCG tax exemption.
- The residential property you sell must be a long-term capital asset. You must have held the residential property for more than 24 months before selling it.
- If you want your capital gains to be exempted from taxes, you should acquire another residential property within two years from the old house’s transfer date. You can also invest the capital gains in constructing a new residential house within three years of selling the old property to avoid paying taxes.
- Section 54 also provides LTCG tax exemption if more than one house is being purchased or constructed after selling the old one. However, the long-term capital gains should not exceed Rs 2 crore to avail of this benefit. Moreover, a taxpayer can get this exemption only once in a lifetime.
- Earlier, the benefit was only available on purchasing or constructing one residential property but was extended to more than one house from Assessment Year 2021-22.
If you plan to sell your old house but do not wish to invest in another property, then the money can be invested in specified bonds to save on tax.
You can invest up to Rs 50 lakh in such bonds within six months from the sale date of the old house.
You can invest in bonds issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Indian Railways Finance Corporation (IRFC), and Power Finance Corporation (PFC) to save tax on the proceeds of the sale of the property.
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