How to save capital gain tax on sale of immovable property in India

 In India, if you sell immovable property (like land or a building) and make a profit, you may be subject to capital gains tax. However, there are several ways to save or reduce this tax:

1. Understand the Types of Capital Gains:

• Short-Term Capital Gains (STCG): If you sell the property within 24 months of purchase, the gains are treated as short-term and taxed as per your income tax slab.
• Long-Term Capital Gains (LTCG): If you hold the property for more than 24 months, the gains are treated as long-term and taxed at a flat rate of 20% with the benefit of indexation.

2. Indexation Benefit:

• For long-term capital gains, the cost of acquisition and improvement of the property can be adjusted for inflation using the Cost Inflation Index (CII). This reduces your taxable gains.

3. Reinvestment in Residential Property:

• Under Section 54, if you reinvest the gains from the sale of a residential property into another residential property within a specified period (1 year before or 2 years after the sale), you can claim exemption from LTCG tax on the amount reinvested.

4. Reinvestment in Specified Bonds:

• Under Section 54EC, you can invest up to ₹50 lakhs in bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) within 6 months of the sale. This investment has a lock-in period of 5 years.

5. Construction of a New House:

• If you sell one house and buy or construct a new residential house, you can claim exemption under Section 54F, provided you do not own more than one residential house (other than the new one) at the time of sale. The entire amount of the capital gain can be exempted if the entire amount is invested in the new house.

6. Exemptions for Compulsory Acquisition:

• Under Section 10(37), if your property was acquired under a compulsory acquisition by the government and you reinvest the amount received in a new property, you may be exempt from capital gains tax.

7. Gifts and Inheritance:

• If you inherit property (as opposed to buying it), the capital gains will be calculated based on the cost to the previous owner, which can sometimes be substantially lower than the market value.

8. Invest in Agricultural Land:

• Agricultural land is not subject to capital gain tax if sold, as it is considered a long-term asset.

9. Co-own the Property:

• If you co-own the property, each co-owner can claim an exemption on their respective share of the gain.

10. Keep Proper Documentation:

• Maintain proper documents proving the acquisition cost, improvements, and the selling price to accurately compute capital gains and ensure you can substantiate your claims for exemptions.

11. Consult a Tax Professional:

• Given the complexity of tax laws and potential changes, consulting a tax advisor or professional can provide tailored strategies and ensure you comply with regulations while optimizing your tax savings.

Conclusion:

By understanding the provisions available and planning your investments wisely, you can effectively reduce your capital gains tax liability on the sale of immovable property in India. Always stay updated with current laws, as tax regulations may change over time.