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Save Long Term Capital Gains Tax on Sale of House?

There is a famous saying “Home is where the heart is” .Home is someplace they welcome you no matter when you come .But there is a problem .A home in a city costs money…and lots of it. You might have to save money for several years or even avail a loan before you buy a house. After keeping your house for several years you want to sell it. But there is a problem. You have to pay taxes on the profits you get by selling your house.

What is a capital gain on a house?

If you buy A house And sell it for a profit your gains are called capital gains.

Capital gains you get by selling your house or a property So what is indexation?

Prices of goods such as fruits, vegetables, meat, services such as transport, houses, garments and so on increase with time. This is inflation. Indexation basically means you take the effects of inflation into consideration while calculating tax on your capital gains.

Calculation of your LTCG tax using indexation

You have purchased a house in an upcoming area in Bangalore for INR 30 Lakhs on May 2010 .You sold this house after 3 years for INR 60 Lakhs on July 2013.

 Date you purchased units of the debt mutual fund February 2010 Date you purchased the house May 2010 Date you sold the house July 2013 Purchase price of the house INR 30,00,000 Selling price of the house INR 60,00,000 CII for the year 2010- 2011 (Purchase) 711 CII for the year 2013 – 2014 (Sale) 939

Indexed purchase price of the house

Indexed purchase price of the house = INR 30,00,000 X 939/711
Indexed purchase price of the house = INR 30,00,000 X 1.32
Indexed purchase price of the house = INR 39,62,025.

Long Term Capital gain = Selling price of the house – indexed purchase price of the house.
Long Term Capital gain = INR 60,00,000 – INR 39,62,025
Long Term Capital gain = INR 20,37,975.
Your Long Term Capital Gain is taxed at 20% = INR 20,37,975* 20% = INR 4,07,595.
You have to pay a Long Term Capital Gain Tax of INR 4,07,595.
But do you need to pay taxes at all on your long term capital gains
No ....You can use Section 54 to save on your long term capital gains tax.

How to save tax on Long Term Capital Gains?

Section 54
You need to invest your long term capital gains in

• A residential house/property/apartment within 2 years of selling your house.
• If you have already purchased a residential house/property/apartment within a year before selling your house
• Construct a residential house/property within three years of selling your house

You can set off (adjust your long term capital gains against the cost of this newly purchased/constructed house or apartment up to its cost). You have to invest the long term capital gain in a single residential house within the country. You don’t want to invest in a new property immediately You can deposit your long term capital gains in a capital gains account scheme before the due date of filing your income tax returns. You can withdraw this money and then invest in the residential house/property within the time specified (2 or 3 years) You get interest on this amount just like on a savings bank account.

You can also use Section 54 EC to save on your long term capital gains tax

Section 54 EC
You need to invest your long term capital gains in

• Tax saving long term bonds of REC or NHAI within 6 months of selling the residential house/property.
• You are exempted only INR 50 Lakhs in tax saving bonds even if investments are made over two financial years. (If you sell your house anytime in a particular year then you can invest only INR 50 Lakhs in that year and the next year put together).

If you know your taxes you can definitely save on them. Imagine all that money you save on taxes going into your pocket. What can you not buy? All you need to do is to take time out from your work and pay attention to tax.