Selling
your property would result in a large cash inflow. Here is how to ensure that
you don't end up with a huge tax liability in the process
Keep
an eye on the calendar when you sell your house. If you don't time it right,
you could end up paying a hefty tax. If a property is sold within 3 years of
buying it, any profit from the transaction is treated as short-term capital
gain. This is added to the total income of the owner and taxed according to the
slab rate applicable to him.For those earning over `10 lakh a year, this shaves
off 30% of profits from sale.
Also,
if a house is sold within 5 years of the end of the financial year in which it
was purchased, tax benefits claimed go out of the window. The tax deduction
claimed for the principal repayment, stamp duty and registration under Section
80C are reversed and the amount becomes taxable in the year of sale. Only the
deduction of the interest payment under Section 24B is left untouched.
This
is why it is advisable to hold a property for at least three years. If you sell
after three years, the profit is treated as long-term capital gains and taxed
at 20% after indexation. Indexation takes into account the inflation during the
holding period and adjusts the purchase price accordingly, thereby slashing the
tax burden for the seller (see graphic). There are other benefits too.The owner
can claim exemptions in the case of long-term capital gains, but no such
benefit is provided for short-term gains. “Expenses incurred on repairs and
renovation can be added to the cost of acquisition while computing longterm
capital gains. The interest paid during the pre-construction period can also be
added to the cost, if not already claimed as a deduction earlier,“ says Vaibhav
Sankla, Director, H&R Block India.
How
to avoid tax
There
are several ways to avoid paying tax when you sell a house. There is no tax to
be paid if you use the entire gain from the transaction to buy another house
within two years or construct one within three years. The twoand three year
period applies even if you bought another house a year before selling the first
one. But the property should have been bought in the name of the seller.In case
the entire capital gains are not invested, the balance amount is charged to
long-term capital gains tax. However, the entire tax exemption will be reversed
if the new property is sold within three years of purchase or construc tion. In
such a case, the entire capital gains from the sale of the previous house will
be considered as short-term gains and taxed at the normal slab rates.
If
you are not keen to lock-in your gains from the sale of a house in another
property , there is another way out.You can claim exemption under Section 54
(EC) by investing the long-term capital gains for 3 years in bonds of NHAI and
Rural Electrification Corporation Limited within six months of selling the
house. However, one can invest only up to `50 lakh in these bonds in a
fiscal.From the current financial year, sellers also have the option of
investing the entire long-term capital gain in a technology driven start-up
(certified by the Inter-Ministerial Board of Certification) to get relief from
tax. The investment in computers and software for your startup will be eligible
for exemption from tax on the sale of house held for at least three years.
Apart from this, sellers also have the option set off long-term capital gains
from sale of the house against any long-term loss from sale of other
assets.These can be losses carried forward over the past 8 years or even those
incurred in the same year. However, the only way to avoid tax on short-term
capital gains is to set it off against any short-term loss from the sale of
other assets.
Dealing
with TDS
To
plug tax leaks, the government has now made it mandatory for buyers to deduct
TDS when they buy a house worth over `50 lakh. TDS of 1% of the value of the
property has to be deducted before making the payment to the seller.Till last
month, this amount was required to be deposited within seven days from the end
of the month in which the sale transaction was carried out, but from 1 June,
the period has been extended to 30 days. Since this payment is made on behalf
of the seller and linked to his PAN, it is reflected on the seller's Form 26AS.
The seller must also obtain a TDS certificate in Form 16B from the buyer. The
seller can claim a refund of TDS if he is incurring a loss on the sale of the
house or if he is claiming exemption from long-term capital gains. To claim the
refund, he should provide details of investment of the capital gains in his tax
return. Alternatively , he can obtain a certificate from the assessing officer
specifying that no TDS must be deducted on payments made to him, and present
this certificate to the buyer.
Credit : http://epaperbeta.timesofindia.com/
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