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File Income Tax Returns and Save Tax

Have you ever wondered why income tax is a single word? "Income tax". The reason is simple. You earn any income. You have to pay tax. Income and tax are like two sides of the same coin. There is always a tax on whatever you earn. This makes tax evasion although illegal a thriving business. A legal way to save on your income tax is tax avoidance. The Government has given you a number of exemptions and deductions to save on your taxes.

Do you know what are capital gains?

If you buy

  • A house
  • Debt fund (Gold Exchange traded fund, Fixed maturity plan, Debt mutual fund)
  • Equity (shares and mutual funds)
  • Gold jewellery/ornaments/coins

Capital gains you get by selling your house or a property

If you make a profit by selling the house / property within a span of three years this is known as a short term capital gain. These gains are added to your total income and taxed as per the income tax slab you fall under. If the property is held and sold in a time beyond three years the profit realized is known as a long term capital gain. Your long term capital gain are taxed at 20%.There is an indexation benefit.

How filing your tax returns helps you save tax on LTCG you get by selling your property?

You have purchased a property in Bangalore in May 2011 in an upcoming area worth INR 50 Lakhs from a reputed builder. You have to pay a stamp duty of 6% and registration charges of 1% on this property. This is an additional sum of INR 3,50,000 (7% on INR 50 Lakhs) which you have to pay along with the purchase of your property. The total cost of the property You want to save on the stamp duty and the registration costs of the property. The builder gives you an excellent suggestion. He suggests that since there is a big difference between the circle rate for the property (Minimum value for the sale of a property set by the Government) and the actual market rate of the property (Amount you/buyer pay for the property) you could pay part of the money in cash (black) and the rest of the money in cheque (white) for the property you purchase. You could pay INR 15 Lakhs in cash (black) and INR 35 Lakhs through cheque (white) .You and the builder can undervalue the property. This means you have to pay stamp duty of 6% and 1% registration charges only on INR 35 Lakhs as the property is undervalued. This is (7% on INR 35 Lakhs ) which is INR 2,45,000. You can save INR 3,50,000 –INR 2,45,000 = INR 1,05,000 on your stamp duty and registration charges by undervaluing your property.

You refuse to undervalue the property…Is it a good idea?

You purchase the property for INR 50 Lakh in May 2011 and sold it for INR 1 Crore on September 2014 The gains of INR 50 Lakhs are long term capital gains. The long term capital gain is taxed at 20% with indexation.

You pay INR 50 Lakhs for the property in Cheque (White) Had you paid INR 15 Lakhs for the property in Cash and the remaining INR 35 Lakhs in Cheque
Date on which property was bought May-2011 May-2011
Date on which property was sold Sep-2014 Sep-2014
Registered buying price of the property INR 50 Lakhs INR 35 Lakhs
Money paid in cheque INR 50 Lakhs INR 35 Lakhs
Money paid in cash INR 0 INR 15 Lakhs
Money saved on stamp duty and registration cost because of paying in black/cash INR 0 INR 105000
Selling price of the property INR 1 Crore INR 1 Crore
Long term Capital gains =(Selling price - Registered buying price) INR 1 Crore – INR 50 Lakhs = INR 50 Lakhs INR 1 Crore – INR 35 Lakhs =INR 65 Lakhs
CII for the year 2011 - 2012 (Purchase) 785 785
CII for the year 2014 - 2015 (Sale) 1024 1024
Indexed purchase price of the property = (Registered buying price of the property) * (CII for the year of sale) / CII for the year of purchase. = 5000000 * 1024 /785 = INR 65,22,293 = 3500000 * 1024 /785 = INR 45,65,606
Capital gain = Selling price of the property – indexed purchase price of the property. INR 10000000 – INR 6522293 = 34,77,707 INR 10000000 – INR 4565606 = INR 54,34,394
LTCG taxed @ 20% INR 3477707 * 0.2 = INR 6,95,542 INR 5434394 * 0.2 = INR 10,86,879
  • You paid taxes of only INR 6,95,542 on your long term capital gains as the entire cost of the property is paid in cheque. (INR 50 Lakhs in white).
  • Had you paid part of the money of INR 15 Lakhs in cash (Black) you would have to pay INR 10,86,879 as a tax on your long term capital gains

You save INR 10,86,879 – INR 6,95,542 = INR 3,91,337 by paying for the entire cost of the property in cheque. Hold on…Wouldn’t you have saved INR 1,05,000 on the stamp duty and registration charges had you paid part of the property value in cash.(Black) Yes…you definitely would have. But you save INR 3,91,337 on the LTCG Taxes by paying for the whole cost of the property in cheque.(White) Your net savings are INR 3,91,337 – INR 1,05,000 = INR 2,86,337. You file your income tax return and avail indexation benefits on your long term capital gains by selling your property. Taxation does have its positives.

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