How to save tax on capital gain

                                                                   How to save tax on capital gain

Whenever a person sells an asset, then the biggest problem in front of him is to pay tax on the income earned from selling that asset, which we also call capital gains tax.

Today, most of the people in India have invested money in property, so that they can make a good income by selling this property later. But when they sell the property, they have to pay a huge amount of tax on their income, leaving them with very little income in their hands.

What is section 54?

 Section 54 is applicable to an individual or HUF. According to this section, if you sell any long-term residential house property, then you can get an exemption from tax by fulfilling certain conditions.

“Residential house property held for more than 24 months shall be treated as long term residential house property”

It does not matter whether the house property is being used by you for your own living or you have kept it on rent.

Conditions to be fulfilled for availing of the exemption:

• New residential house property is purchased or house property is constructed by the individual or HUF for availing exemption in section 54,
• The new house property must be purchased within one year from the date of transfer of the old residential house property or within 2 years from the date of transfer.
• If the house property is being constructed then it should be completed within 3 years from the date of transfer.
• The house property which is being purchased or constructed, that house property should be in India only.

Amount of Exemption

After fulfilling the conditions of section 54, an individual or HUF becomes entitled to get an exemption in this section.

Amount of exemption given in this section:

If the amount of capital gain is less than the cost of new house property, then the entire capital gain will be exempt from tax.

Further, if the capital gain exceeds the amount of the cost of the new house property, then the amount of cost of the house property will be exempted and the balance amount will be taxable. (Capital gain – the cost of new house property = Taxable Capital gain)

Result on selling new house property within 3 years –

If the New House Property is sold within 3 years from the date of its purchase or completion of construction, the exemption availed by you under section 54 will be taxed.

The amount of exemption will be taxed in the year in which the new house property was sold.

The amount of exemption taken in section 54 for taxation shall be deducted from the cost of acquisition of the new house property when computing the capital gains of the new house property.

Capital Gains Deposit Account Scheme

If the amount of capital gains is not utilized by you for the purchase or construction of new house property before the due date of ITR, then you will have to deposit this amount in a bank account to avail exemption under section 54. This bank account will be opened only in any public sector bank or IDBI bank under the capital gain account scheme 1988.

On depositing the amount of capital gain in this account, you will get the amount deposited in this account and the amount spent in the purchase or construction of new house property till the due date of Income Tax Return filing.

The amount deposited in this account should be used only for the purchase or construction of new house property. This amount should be used within the prescribed time limit (purchase within 2 years or construction within 3 years).

If this amount is not utilized within the stipulated time limit, then the unutilized amount will be taxable in your hands after the expiry of the time limit.

Other important rules – section 54 of the income tax act

• Section 54 allows an exemption for the purchase or construction of only one house property. (But in the interim budget presented on February 1, 2019, this limit has been increased to 2 house properties)
• In the case of Compulsory Acquisition, the time limit for purchase or construction of house property will be from the date of receipt of compensation.
• In order to get an exemption for construction of house property under section 54, it is necessary that the construction should be completed within 3 years from the date of transfer. However, it does not matter when the construction started.
• The flat allotted under the self-financing scheme of DDA or co-operative societies or other institutions will be treated as construction of house property.
• It is not mandatory that the income tax return should be filed before the due date to get the exemption of section 54.
• On the death of the assesses, the amount of capital gain deposited in the bank account which was not utilized will be tax-free.