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Tax Implications on Sale of Flat - How to Save Capital Gain Tax?

Planning to sell your flat? Hold on, read this article carefully before finalizing the deal.

Even if you are making a good profit by selling your flat, keep this in mind that you will have to shell out a huge amount in terms of Capital Gain Tax as well as reversal of the Income Tax benefits you availed on the Principal and Interest on your home loan!

Capital Gain Tax - Short Term and Long Term

If you are selling the property within three years of purchase(possession), the profit earned comes under Short Term Capital Gain(STCG). The gain from the sale is added to your income and taxed as per your tax bracket.

If you are selling your property after three years, the profit earned is taxed under Long Term Capital Gain(LTCG). In this case, the tax calculation is bit complex, don't worry, you can find all the details in the next section.

Tax Calculation for Long Term Capital Gain

The effective tax on LTCG is 20% but is calculated considering the inflation. The original purchase price is multiplied by Cost Inflation Index(CII), issued by Central Board of Direct Taxes, to calculate the current market price of your property.

Cost Inflation Index for the current financial year is 852.

Formula to calculate LTCG

LTCG is calculated using the below formula:

LTCG = Sale Price - Indexed Purchase Price
Where,
Indexed Purchase Price = Purchase Price X (CII for 
the year of Sale /CII of year of Purchase)

Cost Inflation Index(CII) for last four financial years given below:

2009-10 - 632
2010-11 - 711
2011-12 - 785
2012-13 - 852

Illustration

In May 2009, Mrs. Suchitra bought a flat from a reputed builder in Bangalore for Rs.50L. After three years and six months, she sold her property for a profit of Rs.20L. She will have to pay Rs.51,898 as Long Term Capital Gain Tax as per the below calculation:

Purchase Price: Rs. 50L
CII of year of Purchase - 632(financial year 2009-2010)
CII of year of Sale - 852(financial year 2012-2013)
Indexed Purchase Price = 50,00,000x(852/632) = 67,40,506
LTCG = 70,00,000-67,40,506=2,59,494
Tax with Indexation = 2,59,494x20/100=51,898

Reversal of Income Tax Benefits on Home Loan

If you are selling your property before completing three years, as per the Income Tax Act, the income tax benefits availed in previous years will be reversed. The amount deducted will be added to your taxable income in the year of sale and taxed as per your tax bracket.

Selling Under Construction Property

Under-construction property does not comes under Capital Gain as the property does not belong to you but only the right to purchase.

How to Save or Reduce Capital Gain Tax?

There are various options available in the Income Tax Act to save Capital Gain Tax.

  1. Purchase Another Residential Property - Profit earned from selling a property is exempted from tax if it is re-invested in another residential property within two years(three years if under-construction) of sale or constructed another house within three years of sale. Note that you should not own more than one property to avail this exemption.
  2. Invest in Capital Gain Bonds - The gain form the sale could be invested in Capital Gain Bonds(Section 54EC) issued by National Highways Authority of India(NHAI) and Rural Electric Corporation Ltd(REC) which are exempted from tax. There is a lock-in period of three years and a maximum limit of 50Lakhs(per financial year) and the investment needs to be made within six months of sale.

Disclaimer: The information provided in this article is for information purpose only. Please consult a tax expert for all your tax related queries.

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