Skip to main content

Tax Planning on profits from sale of Real Estate investment

 
Tax Planning Strategies article in Advisorkhoj - Tax Planning: How to save taxes on profits from sale of Real Estate investment
Picture courtesy - GraphicStock

Even though the real estate market has been somewhat subdued in the last one to two years, over the past ten years, real estate in India has given good returns. Enticed with the idea of owning a house and seeing their assets rapidly appreciate in value, countless Indians have invested a large part of their savings in real estate. Buying and selling residential or commercial real estate is part of the portfolio of many investors. Many cities and suburbs have seen a veritable real estate boom in the last decade. While real estate investments of many investors have appreciated in value, real estate investors cannot escape tax consequences when they book profits. To escape tax consequences, it is a fact that some real estate investors transact in cash. However, it is illegal to deal in cash and the consequences are severe, if investigated by the Income Tax authorities. It is possible to save taxes on your real estate investment, without having to resort to illegal means. In this article, we will discuss how you can save capital gains tax on your real estate investment.

What is capital gains tax on Real Estate?

Capital gain in the real estate context means the profit earned from sale of your real estate investment, residential or commercial. The tax consequence arising out of capital gains is called the capital gains tax. From a real estate perspective there are two kinds of capital gains.

  • Short term capital gains:

    If the capital gain is on sale of property which is owned by the seller for less than three years period then it is short term capital gain. Short term capital gain is taxed as per the income tax bracket of the seller.

  • Long term capital gains:

    If the capital gain is on sale of property asset which is owned by the seller for more than three years period then it is long term capital gain. Long term capital gain is taxed at 20% with indexation (we will discuss, how to calculate long term capital gains, in the next section of the article).

How to calculate capital gains tax on Real Estate sale?

Let us understand with the help of an example. Let us assume that, you are an investor in the highest tax bracket (i.e. 30% tax bracket) and you bought a property on July 1, 2011 at a cost of Rs 30 lacs. Let us further assume that the property value appreciates at a rate 15% per annum. If you sold the property in July 1, 2013 at a price of Rs 40 lacs, what is your capital gains tax?

In this case, the short term capital gains tax is Rs 3 lacs and the net return is Rs 7 lacs.

But what if you sold the property on July 15, 2014 instead of July 1, 2013? Since the holding period is more 3 years, long term capital gains will apply. Let us assume at the same rate of appreciation, the value of property as on July 15, 2014 is Rs 46 lacs. What is your capital gains tax?

Therefore, we can see that it is advantageous to hold on to your property for more than 3 years, because the long term capital gains tax rate with indexation is much lower than short term capital gains tax rate. Also, investors should note that, if they have invested funds for repair of their property, such repairs can also be indexed and included in the calculation of capital gains from a tax perspective.

How is the holding period defined?

The holding period is defined as the period till date, from which you were granted the "Right to own the Property". The Bombay High Court has clarified the definition of capital asset as defined in Section 2(14) of the Income Tax Act. From an Income Tax perspective, the right to obtain conveyance of immovable property was clearly "property" as contemplated by Section 2(14) of the I.T. Act, 1961. The issue of allotment letter gives the right to obtain conveyance. Therefore the holding period from an income tax perspective applies from the date the allotment letter was issued to you.

How can you save Long Term Capital Gains Tax?

Under Section 54 of the Income Tax Act, the seller of a real estate asset can claim for long term capital gains tax exemption, through these two methods.

  • The seller must use the capital gain, arising out of the sale of his or her real estate investment, to buy or build another house

  • The seller must use the capital gain, arising out of the sale of his or her real estate investment, to invest in specified capital gains bonds.

Therefore, continuing with our above example, if you have made a profit of Rs 15 lacs on the sale of your property, and you re-invest the entire capital gain amount (e.g. Rs 15 lacs) in a new property in the same financial year when the sale was made, then you will be exempt from long term capital gains tax on the sale of your property.

What if you have not been able to identify a property to avail benefits under Section 54?

If you are not able to identify a property in same financial year after selling property, you can still avail the tax benefits under Section 54 of the Income Tax Act, provided you buy another house in 2 years or build another house in 3 years. To avail of long term capital gains tax benefit, you have to open a special account called capital gain accounting scheme and deposit the amount of capital gains in the capital gains account before the due date of filing of income tax returns for the assessment year in which the asset sale was. All withdrawals from the capital gains account should be made only for purchase of property. Continuing with our above example, if you deposit the entire capital gain amount (e.g. Rs 15 lacs) in a capital gains account before the date of filing of IT returns for the assessment year 2014 - 2015, which will be sometime in end of July 2014, you will be able exempt from long term gains. You will be able draw funds from your capital gains account to buy another house in 2 years (i.e. by 2016) or build another house in 3 years (i.e. 2017). However if you fail to purchase a property within three years after selling your property, the entire sales proceeds will be exposed to Long Term Capital Gains and the tax consequences thereof.

How to open a Capital Gains Account?

You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account.

Investment in Specified Bonds

Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the sale, the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long-term specified asset during any financial year shall not exceed Rs 50 lacs. There was an ambiguity in the language of the specific provision in Section 54C. As a result, if you made a profit of Rs 1 crore on the sale of your house transferred in December, you could invest Rs 50 lacs in March of that financial year and further Rs 50 lacs in April of the next financial year. However the 2014 Budget presented in the Parliament a few days back has clearly specified that, the maximum deduction which can be availed is Rs 50 lacs in one financial year in which the sale was made and separate deduction cannot be claimed in the subsequent financial year. Therefore the maximum tax benefit you can get under the provisions of the new Budget is Rs 50 lacs.

Conclusion

Real estate is an attractive and popular investment option for many investors in India. With careful planning you can save a substantial part of your long term capital gains tax, without having to resort to illegal means.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now