With the festive season kicking in, real-estate builders have been advertising projects stating “Set off your capital gains tax.”
The builder isn’t wrong. Yes, you can set off your capital gains tax by investing into projects. But there are rules laid out which one should follow. A minor mistake could make you pay taxes through the nose on the property you sold even though the capital gains tax can be reduced to nil through proper planning.
To understand how to set off gains, let us understand how they are built. Once you buy a property you need to hold them for at least three years to actually be able to save tax. If you sell it within three years then the entire appreciation would be added to your income and taxed as per your bracket.
Now, let’s see how to save taxes on the amount you earn after selling a property held for long-term (3 years). You can invest the amount earned into another property either one year prior to selling the old house or two years after. If you plan to construct a house, then the same has to be completed within three years of selling the old house to save taxes.
But up need to purchase another residential property only to claim exemption. A piece of land purchased to construct a house too can be bought using the gains.
The amount exempted would be calculated as:
Capital gains X cost of new asset / net consideration
What if you are still left with cash earned from the sale of old house after purchasing the new property? There is a way to protect this money from taxes too. This balance can be invested in the Capital Gains Account Schemes of public sector banks or bonds such as NHAI and REC which have a three year lock in. The investment should be completed before your tax-filing deadline date after the transfer of assets.
The story doesn’t end once you deposit this money. You need to invest this money to construct another house within the next three years, else you would have to bear taxes.
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for E filing their Income Tax Returns Online.