Tips on lowering tax liability on profits made on sale of property
Real estate has,
over the years, become like any other asset to be bought and sold with the aim
of gaining from capital appreciation. While this can give good returns, it can
also mean a hefty tax outgo. Irrespective of how the property has been
acquired, the taxman looks at each and every real estate transaction.
QUICK FLIP
Those who churn real estate investments fast are likely to pay the highest tax. This is because if the property is sold within three years of purchase, the short-term capital gain is calculated by deducting from the sale price the cost of acquisition, the money spent on improving the property and the transfer cost.
Capital gain from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer:
The gain is included in the taxable income for the year the money is received and taxed according to the person's tax slab.
An investment gone
wrong will result in a short-term capital loss. "Short-term loss from sale
of a
QUICK FLIP
Those who churn real estate investments fast are likely to pay the highest tax. This is because if the property is sold within three years of purchase, the short-term capital gain is calculated by deducting from the sale price the cost of acquisition, the money spent on improving the property and the transfer cost.
Capital gain from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer:
The gain is included in the taxable income for the year the money is received and taxed according to the person's tax slab.
property can be set off against capital gain from any other short- or long
term asset during the financial year,".
The option of setting off short term loss against capital
gain is a big advantage here. If the current year's capital gain is inadequate,
the net capital loss can be carried forward for eight financial years for
adjusting against any gain.
LONG-TERM INVESTMENTS
Any profit booked after three years of buying the property is
considered a long-term gain. The calculation is the same as that for short-term
gain, except that the cost of acquisition and improvement is adjusted for
inflation (called indexation ).
Let's
assume you buy a property for Rs 25 lakh and sell it after five years for Rs 35
lakh, making a profit of Rs 10 lakh. However, your actual gain will be lower
after indexation. Long-term capital gains from real estate are taxed at 20%.
You cannot claim regular tax deductions against long-term
capital gains. Tax on such gains has to be computed separately. If your total
income is below the tax exemption limit (Rs 2 lakh for individuals other than
senior citizens), only the part of long-term capital gains above the exemption
limit will be taxed (at 20%). Unlike in shortterm gains, losses from long-term
assets can be set off only against gains from long-term assets.
INHERITANCE & GIFTS
Sale of a property that is inherited or accepted as a gift will
also attract capital gain/loss provisions even though you haven't spent any
money to acquire it. In such a case, capital gains will be computed on the
basis of the cost to the previous owner, indexed to the year of purchase.
"In cases where the property has been inherited, the
cost to the original owner will be considered as the cost of acquisition for
computing capital gains. If the property has been acquired prior to 1 April
1981, the acquisition cost will be the cost incurred by the original owner or
the fair market value of the property as on 1 April 1981, whichever is
higher," says Sirwalla of KPMG.
For computing long-term gains, the purchase cost
will be indexed based on the cost inflation index published by the tax
department. If the property was purchased before 1 April 1981, the indexation
figure for 1981-82 would be used.
"Any money spent on improvement by the seller and the
previous owner prior to 1 April 1981 will be ignored. For improvement expenses
after this date, the indexed cost as per the relevant financial year will be
added to the cost of acquisition," says Sudhir Kaushik, co-founder,
TaxSpanner.com, a tax intermediary website.
SAVING TAX
You cannot avoid tax on short-term capital gains. However,
you can claim deductions to lower the tax liability on long-term gains.
Buy a house: Houses are a popular investment option.
Long-term capital gains from selling a house get tax exemption if they are
invested in buying or building a new house. The new house has to be bought one
year before the transfer of the first house or within two years after the sale.
The deduction allowed is equal to the actual investment or the capital gain,
whichever is lower.
If you plan to use the gain to build a house, it has to be
done within three years of the sale of the property. When you buy a plot to
build a house, the cost of land is included in the construction cost. Even
buying an under-construction property entitles you to tax deduction.
"One can buy an under construction apartment to save
capital gains tax, provided its construction is completed within three years of
the transfer of the first property,." If the new property is sold within
three years of purchase or construction, the deduction is reversed and taxed as
short-term capital gain.
Let us say you purchase a new house for Rs 15 lakh and claim
a deduction of Rs 10 lakh. The exempted amount will be deducted from the
purchase cost for calculating the capital gain in the next three years (Rs 15
lakh-Rs 10 lakh). Now suppose you sell this house after two years for Rs 25
lakh. Your capital gain will be Rs 20 lakh (Rs 25 lakh-Rs 5 lakh), even though
the actual appreciation is only Rs 10 lakh. If you buy an under-construction
independent house and resume construction, the cost incurred in further
construction will also be eligible for tax exemption under Section 54 of the Income
Tax Act,.
In cases where capital gains have been made by selling land
(or any asset other than a house), the investments required for deductions are
different. Full deduction is allowed (under Section 54F) in cases where the
entire sale proceeds are invested in a new house or used to build a new house.
If you use a part of the money, the deduction will be proportion of the
invested amount to the sale price. The time-frame for investment is the same as
that for capital gains from residential property. You should not own more than
one house prior to the investment. The deducted capital gain (from non-house
assets) becomes taxable if you buy a new house within one year of the transfer
of the original asset or construct a new one within three years. If the new
house is sold within three years, the deduction claimed will become taxable as
a long-term gain.
If you do not want to lock the entire proceeds in a
residential property, you can invest the capital gain in specified bonds.
BANK ACCOUNTS
Buying or constructing a house generally takes a long time.
If you fail to make the investment before filing your tax return for the
financial year, you can still avail of the deduction by letting the taxman know
about your plan using the Capital Gains Account Scheme (CGAS).
"An individual can deposit the capital gain in an
account opened under the Capital Gains Account Scheme with any public sector
bank if it has not been fully utilised for purchase or construction of a new
property. This has to done before the deadline for filing the return,"
says Kaushik of TaxSpanner.com.
The deposited money can be used only to buy or construct a
residential house within the prescribed time frame. Failure to do so will lead
to taxation of the unutilised amount as long-term capital gain after three
years of the sale of the first property.
There are two types of capital gains deposit accounts-savings
deposits (type A) and term deposits (type B, with cumulative or noncumulative
interest options). You can transfer money from one to another by paying fixed
penalties or charges. You can withdraw money from type A accounts by giving a
declaration that the money will be used to buy or construct a house. In such a
case, you will have to use the withdrawn money within 60 days and deposit the
unutilised amount, if any.
The interest rates paid on these accounts are the same as
those on regular savings and term deposits. You will have to pay tax on the
interest earned as it accrues in your account, but it cannot be withdrawn. You
will have to attach the proof of the deposit with your return. If the deposited
amount is not used fully to buy/construct a new house, the remainder will be
treated as capital gain at the end of three years from the date of the sale of
the original asset.
INVEST IN BONDS
If you do not intend to invest in a house, you can buy specified financial
assets. "Capital gains from sale of any
long-term asset can be claimed as tax-exempt under Section 54EC of the
Income-Tax Act by investing in notified bonds within six months of its
transfer," says Sirwalla.
These bonds are issued by the Rural Electrification
Corporation and the National Highways Authority of India. The exemption is
equal to the investment or the capital gain, whichever is lower. If you
transfer or take a loan against these bonds within three years, the capital
gain will become taxable.
You can invest a maximum of Rs 50 lakh during a financial
year in these bonds. If you have a capital gain of more than Rs 50 lakh where
the six-month tenure extends into another financial year, you can invest the
remaining amount as well.
MANUFACTURING GROWTH
From 2012-13, long-term capital gains from
sale of a residential property will be tax-free if the sale proceed is invested
in a small or medium enterprise in the manufacturing sector. The fund should be
used to acquire new plant and machinery within six months. You become eligible
for an investment made before due date of filing the income tax return,
provided your equity holding or voting power after the investment is more than
50%.
WHEN GAINS ARE NOT TAXED
When you sell farm land, you do not have to pay any capital gains tax on the
profit earned. The exemption is not valid if the land is within the limits of a
civic body (municipality, municipal corporation, town committee or a cantonment
board) with a population of 10,000 or more at the beginning of the previous
year. It also does not apply if the land is within 8 km of such civic limits.
If you have made capital gains from sale of land used for agricultural purposes
(by the assessee or his/her parents) for at least two years before the transfer
date, the money can be invested in any land for agriculture. The invested
amount then becomes eligible for deduction. The exemption is withdrawn if you
buy another land within two years of the deduction.
Source: Business Today
Thanks for providing lowering tax liability information.
ReplyDeletedebt consolidation brampton
Thanx for your comment.....Michle.
ReplyDelete