Are you questioning the effect on your taxes after the federal government's recent modification in the capital gains tax regime genuine estate? Well, house owners will now have the choice of 2 tax rates on long-lasting capital gains: a 12.5% rate without indexation or a 20% rate with indexation benefit.

Selling a residential or commercial property can be a significant monetary transaction, however it is essential to understand that it might also attract capital gains tax. However, there are a number of strategies you can utilize to lower the tax concern and conserve more of your hard-earned money. In this post, understand what is capital gains tax on residential or commercial property and explore various approaches to conserve on capital gains tax when offering a residential or commercial property.

What is Capital Gains Tax on Residential Or Commercial Property?

Capital gains tax on residential or commercial property is a tax troubled the revenue made from offering a property. When you sell a residential or commercial property for more than its purchase rate, the distinction in between the asking price and the expense of acquisition is thought about as capital gain. This gain undergoes tax according to the dominating tax laws in India.

Different Types of Capital Gains

There are 2 types of capital gains: short-term (STCG) and long-term (LTCG). The period of holding identifies whether the gain is short-term or long-term.

Short-term Capital Gains (STCG): Residential or commercial property offered within two years of acquisition is taxed at 20%. Long-term.

Capital Gains (LTCG): Residential or commercial property offered after holding it for more than 2 years is treated as a long-lasting capital gain. Currently, LTCG on residential or commercial property sales is taxed at a flat rate of 20%, with indexation advantages available or at 12.5% without indexation advantages.

Strategies to Save Capital Gains Tax on Residential Or Commercial Property Sales

1. Joint Ownership

If you co-own a residential or commercial property with somebody else, you can divide the capital gains from the sale amongst the co-owners based upon their ownership share. This allows each co-owner to use their basic exemption limitation and potentially decrease the total tax liability.

Mr. and Mrs. Patel jointly own a residential or commercial property that they bought 10 years ago for 40 lakhs. They decide to sell it for 1 crore. Since they are equal co-owners, they divide the capital gains similarly in between them - 30 lakhs each.

They can claim exemptions as much as 1.25 lakhs each, totalling to 2.5 lakhs on their respective gains, for tax savings and lowering their general tax liability.

2. Reducing Selling Expenses

Certain selling expenses, like remodelling costs, can be subtracted from the sale rate when calculating capital gains on residential or commercial property sales, reducing the taxable capital gains.

Mr. Gupta sold his residential or commercial property for 60 lakhs. However, he sustained costs such as brokerage charges, legal charges, and marketing costs amounting to 2 lakhs, which can be deducted from the price. As a result, the price is 58 lakhs.

3. Holding Period

Holding a residential or commercial property for more than 2 years can certify you for long-lasting capital gains tax rates, which are generally lower than short-term rates.

4. Availing Indexation Benefit

When you offer a domestic property after holding it for at least two years, you can take benefit of the indexation benefit. Indexation changes the purchase expense of the residential or commercial property to account for inflation, which efficiently decreases the quantity of capital gains and consequently the tax on it.

5. Buying a Brand-new Residential Or Commercial Property (Exemption under Sec 54)

One popular technique of saving tax on the sale of a domestic home is by reinvesting the capital gains in another domestic property. Under Section 54 of the Income Tax Act, you can claim an exemption if you satisfy particular conditions-

- Firstly, you need to acquire a brand-new residential or commercial property either one year before or 2 years after offering your existing residential or commercial property. Alternatively, you can build a new residential or commercial property within 3 years of offering your previous one.

- The entire sale proceeds should be reinvested to obtain full exemption. If just the capital gain is reinvested, then the exemption is approved proportionally.

6. Buying a New Residential Residential Or Commercial Property (Exemption under Sec 54F)

Apart from selling a home, if you offer any other property and utilize the earnings to obtain a brand-new residential home, you can declare an exemption under Section 54F.

- Similar to the conditions pointed out above, the new house should be purchased either one year before or more years after offering the asset. Moreover, it should be constructed within 3 years of offering the asset.

- It is very important to note that while declaring this exemption, the seller should not have more than one house, leaving out the freshly gotten one.

7. Tax Loss Harvesting

Losses from sales of mutual funds or shares can be utilized to offset capital gains on residential or commercial property sales to reduce your tax liability.

Ms. Sharma offered some shares of a company at a loss of 3 lakhs. She had also recently sold a residential or commercial property, incurring a capital gain of 10 lakhs. By balancing out the loss from the shares versus the gain from the residential or commercial property, her taxable capital gain would be lowered to 7 lakhs.

8. Buying Bonds (Exemption under Sec 54EC)

Under Section 54EC, you can save on capital gains tax on residential or commercial property by investing in defined bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). The investment requires to be made within 6 months from the date of sale.

Example:

Mr. Kumar, after sustaining 30 lakhs in long-term capital gains from offering his flat, plans to invest this quantity in NHAI bonds within 6 months and claims an exemption of 30 lakhs.

9. Reinvesting Gains into Shares of Manufacturing Companies

Under Section 54GB of the Income Tax Act, individuals have the alternative to reinvest their long-lasting capital gains from the sale of a house into shares of a qualified company participated in production activities.

10. Investing in Capital Gain Account Scheme (CGAS)

Consider buying the Capital Gain Account Scheme (CGAS) to declare exemption. However, it is necessary to keep in mind that the deposited quantity in CGAS ought to be made use of within three years; otherwise, you will be responsible to pay tax on that amount.