People who own ancestral properties often tend to grow a strong connection with it, even though few ever actually put it to use. A number of people however, are able to shed off the emotional bonds with these properties, and look at selling them for sizeable gains. It seems like a perfectly good thing to do too: sell the property to, say, fund a new purchase. There would be no tax liabilities too, right? However, even a basic consultation with a tax expert will bring your hopes down. Reason? Remember that property is regarded as a capital asset and any gains arising from its sale is taxable as 'Capital Gains' under the Income Tax Act 1961.
Property can take the form of a short-term capital asset or long-term capital asset depending on the period for which it is held. If the property is held for less than three years prior to its sale, it is termed as a short-term capital asset and any gain arising from the sale is treated as a short-term capital gain. But if the property is sold after a holding period of more than three years, it is to be treated as a long-term capital asset and a gain arising from its sale is assessed as long-term capital gains.
While short-term capital gains on sale of property is taxable per slabs rates applicable to the individual, long-term capital gains are taxable at a flat rate of 20%. However, under Section 54 of the Act, the seller can claim exemption from capital gains arising out of sale of the house to the extent the capital gains are invested in another residential property subject to fulfilment of the following conditions:a) the new residential house is purchased either one year before or two years after the date of sale or constructed within three years from the date of sale and b) the new property purchased should not be transferred within three years of purchase.
At this point, you might be thinking that the capital gain earned from the sale of property would be huge. So what can you do? Can you invest the capital gains on more than one property and claim the exemption based on the total investment? The answer is no: You must invest the capital gains only in one residential property situated in India. But if you want to take time over deciding what property to buy, you can still avail the exemption while filing your returns by depositing the entire capital gains under Capital Gains Accounts Scheme. The withdrawals from this account should be used only for purchase of the new property and within the specified time limit; else the exemption would not be available.
There are other options to save the tax too in case you do not wish to acquire another property. As per Section 54EC of the IT Act, any capital gains arising from the transfer of a long-term capital asset (which includes property) would be exempt if the gains are invested within a period of six months in specified investments. These investments are three-year bonds of National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC). However, there is a restriction in this investment: the amount invested cannot exceed Rs 50 lakh in any financial year.
The article is authored by Vinit Turakhia, deputy manager and Sudhakar Sethuraman, director, Deloitte Haskins & Sells