1. Short Term Capital Gains Tax

Short Term Capital Gain on property is considered as a gain from selling a property which was held by you for less than 36 months. As a taxpayer, you are liable to pay tax on short term capital gain on property as per your applicable marginal income tax slab. Some key points to remember:

 

1. You are allowed to adjust/ reduce your sale consideration for any brokerage, commission  paid at the time of property sale

 

2. You are allowed to deduct any expenditure on construction and home improvement incurred during the period you held/owned the asset

 

3. Benefit of indexation, i.e. adjustment for Inflation is not allowed on a property transaction classified under short term capital gain

 

4. No exemption or savings is allowed on short term capital gain tax u/s 54 i.e. by re-investment in property or buying capital gains bond issued by REC or NHAI

 

5. Liability under Short Term Capital Gains can be significantly high, if you fall in the higher income tax slab.

 

2. Short Term Capital Gain Tax Calculator

Illustration of Short Term Capital Gains: Mr A sold his property January 2016 at Rs. 50 lakh, which he had purchased in December 2014 for Rs. 30 lakh. As per his income, Mr. A falls in the highest tax slab of 30%. Mr. A spent around Rs. 2 lakh on house improvement during the period and also paid a brokerage of 0.5 per cent of the sale price of the house at the time of selling the house. What will be his taxable capital gains and what is the tax amount payable by him?

 

In this illustration, the gain achieved on this property in its 2 year holding period will be considered as short term capital gain and will be taxed as short term capital gains tax, as per his applicable income tax slab.

 

 

3.  Under section 54, sell a residential property and invest the gains to buy a new residential property and claim exemption on capital gains tax.

 

Under section 54, you can claim exemption on capital gains tax exemption, if you invest full or part of your sale proceeds of a residential property in India in another residential property in India. Rules for exemption are as follows:

 

1. Exemption is available to individuals and HUFs and is available for one residential property
2. The capital gains from sale of a residential property can be set off against the purchase of new residential house. The property sold and purchase should be in India

 

3. The new residential house can be bought either 1 year before the sale of old house or within 2 years from the date of sale of the previous property. In case you plan to construct a house, the construction of the house should be completed within 3 years from the date of sale of the previous property

 

4. Once you have purchased or constructed a new house, you cannot sell it in less than 3 years. If you sell it before 3 years, you will not get the benefit of capital gain exemption and your sale proceeds will be taxable. These 3 years are calculated from the date of acquisition or completion of work of the new house.

 

5. The amount of exemption claimed is lower than the amount of capital gains or the cost of new house purchased.

 

4. Under section 54 F, sell any asset other than a residential property and claim capital gains tax exemption by purchasing a residential house

 

Rules for exemption under Section 54 F are as follows:

1. The new residential house can be bought either 1 year before the sale of old house or within 2 years from the date of sale of the previous property. In case of construction of a house, the construction of the house should be completed within 3 years from the date of sale of the previous asset

 

2. Exemption available only if the taxpayer does not own more than 1 residential house on the date of transfer of such asset other than the one that he has bought to claim deduction under Section 54 F

 

 

3. If the whole sale consideration is not invested and only a part sale consideration is invested in the purchase of new property, the amount of exemption shall be provided proportionately i.e.

 

5.  Under Section 54 EC, sell a long term capital asset and get capital gains tax exemption by investing in 54EC Capital Gain Bonds

 

This section comes in handy for tax payers who have sold their assets and are liable to pay long term capital gains tax, but are unable to take benefit from the rules under section 54 by buying another residential property. These tax payers can save tax by investing their gain in Capital Gains bonds. Rules for exemption are as follows:

 

1. You have to invest the "capital gained" money into these bonds within 6 months of selling your property
2. The money invested into these bonds will be exempted from the capital gain tax
3. TDS is not applicable on money invested in capital bonds. However, interest income from capital gains bonds is taxable. The tenure of capital gains bonds is 3 years and the redemption is automatic.
4. You will not get any interest after 3 years
5. You are not allowed to withdraw your money invested in Capital Gains Bonds before 3 years from the date of investment
6. The face Value of bond is 10,000 and you need to invest a minimum of Rs 20,000 in these bonds
7. These bonds are usually issued by REC and NHAI with an interest rate of 6%
8. These bonds can be held in either demat or physical form
9. These bonds cannot be pledged as collateral for obtaining loans

 

6.  Park your capital gains amount in capital gains account in case you are unable to purchase a property before your Income Tax filing date

 

Capital gains account scheme is available as a temporary method to save capital gains tax. This scheme is for people who are unable to invest in a new property before filing the income tax return. The scheme was introduced in 1988 and under the scheme, a capital gains account may be opened only with specified banks or institutions. The taxpayer can put his gain on his asset transaction in this account for three years. He can withdraw the amount invested for purchasing or constructing his new house, as he takes the decision to do so within the next three years. Features of the scheme are as follows:

 

1. The taxpayer should mention that he has opted for the scheme in his Income Tax Return
2. You can make the deposit anytime in installment or lump sum before the due date of filing income tax return
3. Two types of accounts will be opened under this scheme. One account will enable you to withdraw money as per your requirements and other account will be like axed deposit
4. Money withdrawn from any account has to be used within 2 months for specified use to avail capital gains exemption
5. The deposited amount in this scheme can't be used as mortgage for any loan
6. The interest on capital gains account is taxable.

 

7. Set off your capital gains against any capital loss carried forward from previous years

 

Income Tax Act in India allows that if a tax payer has any capital loss that have incurred earlier and carried forward, he can set off his capital gains against those losses and hence reduce his tax liability. Some key points to remember are:

 

1. Short term capital gains can be set off against short term capital loss and long term capital gain can be set off against long term capital loss only
2. The capital loss can be carry forward for a period of 8 years
3. The capital loss carried forward should have been mentioned in income tax returns.

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