Residential property and tax on capital gain

Residential property and tax on capital gain

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Created By Admin Last Updated Wed, 25-Nov-2020

Capital gain is denoted as the net profit that an investor makes after selling a capital asset exceeding the price of its purchase and the tax that the investor had to pay on the gains are known as capital gains tax.

Moving towards this property let us understand long and short-term investment first. Your hold on the property determines the outflow of your money. Long-term investments are those in which the residential property is hold up for more than 24 months by its owner or seller. You will be taxed according to the tax bracket i.e. short term capital gain or long term capital gain. In the case of long term capital gain, complexity is involved, let’s understand that.

With the help of indexation you will end up paying less tax. Indexation simply refers to adjustment in the purchase price of an investment to reflect the effect of inflation on it. Following are the conditions that will relieve you on capital gain payable tax-

If the property you sold was held up by you for at least 3 years then it is considered as long-term asset. For relief buy a new house within 2 years from the sale date. If you are constructing a new house complete its construction work within 3 years from the sale date. And the final condition for exemption is that the cost which you are going to pay for your new house should be at least equal to the capital gain.

How to compute capital gains?

Calculation of tax on short term capital gain is simpler than on long term gains. For short term capital gain, the gain is added to the total income and then the income tax is calculated based on the tax bracket that you fall in. For long-term capital gains, the government publishes a cost of inflation index (CII) every financial year which is used for indexation. You have to subtract the actual sale price from the actual cost of the purchase to arrive at long term capital gain. You can deposit the long term capital gains on the sale of a property under the capital gains scheme in which the amount you deposited here is considered to use for buying a new house within 3 years otherwise the amount you deposited will be treated as long term capital gain of the previous year.

The government provides exemptions that can be claimed on capital profits made. Such exemption is Section 54 of the income tax act that entitles a person to tax exemption if the entire profit amount is used to buy a new house. The seller can buy a new house within 2 years from the sale date of his previous property or construct a new house within 3 years from the date of sale. But if after the sale of the property you can’t find another of your choice then you can keep it under a capital gains scheme till investment. So these are the reliefs that you can get in paying capital gain tax.

Hope this blog helps you in understanding the taxation of Capital gains.