Selling a house is long and tedious and the fact that you have to pay taxes on the money you make is adding insult to injury. But try as we might we have to go through the rigmarole of paying taxes on profits earned after selling of property.
The profits after selling of property are called Capital Gains; Capital Gains are of two types
- Short Term Capital Gains- If you sell your property within three years of buying it, the profits are short terms capital gains.
- Long Term Capital Gains- Any property sold after three years of acquiring it earns you long term capital gains.
You will be taxed on the profit (capital gains) you make – which is the amount that you earn after subtracting cost of buying (and repairing / improving) the property from the sale value.
The Income Tax Act allows you a few exemptions under the section 54 under the following conditions.
- The profits (capital gains) are used to purchase/construct a new house.
- The new house is bought one year prior or two years post the sale of the old house.
- The new house is constructed within three years of the sale of the old house.
- Only one house is purchased or constructed.
- The new house is not sold within three years of possession.
- If the new house costs less than the sale proceeds, then the exemption applies in proportion. The remaining money is to be reinvested under 54EC within 6 months.
Capital Gains Account Scheme
If construction of a house immediately following the sale of the old one is not possible, then you can invest the capital gains in a public sector bank under the CGAS, the scheme has a three year lock-in period within which you are bound to start construction on your property, otherwise you would be taxed at the long term capital gains tax rate. There are two types of accounts under the scheme.
Another option is to invest in bonds from the Rural Electrification Corporation or the National Highways Authority of India. These bonds also have a lock-in period of three years during which any transfer or loan against them will be taxed as capital gains tax, additionally the bonds have a maximum cap of Rs 50 lac as investment.