How to Save on Capital Gains Tax After Selling a Home?

Saving on Capital Gains Tax 

You may lower your tax burden based on the proceeds from the sale of a home or land. Here is all you need to know about the capital gains tax and the numerous tax breaks.

What is Capital Gain?

Whether you own a home or a piece of land, your property is a valuable capital asset. Its worth increases substantially with time. Therefore, when you decide to sell it, you always want to earn a profit by obtaining a better price than what you purchased. In other words, you profit from your investment. This is referred to as a capital gain.

In accordance with the Income-tax Act of 1961, you are obligated to pay the government a capital gains tax on this profit or income when you submit your tax returns.

Capital Gains Tax Types:

There are two types of capital gains taxes: the short-term capital gains tax (STCG) and the long-term capital gains tax (LTCG). The amount of capital gains tax you must pay depends on how long you owned a property before selling it. If you hold the property for less than two years and sell it during this period, it is considered short-term capital gain and you are required to pay STCG on it. If you hold the property for more than two years and sell it, it is considered long-term capital gain and you are required to pay LTCG on it.

The government has imposed a 15 percent tax on LTCG on the sale of all assets, including mutual funds, equities, and real estate, beginning on April 1, 2022. Consequently, beginning in FY 2022-23, you will be subject to a 15 percent surcharge limit on LTCG tax on gold, debt funds, and real estate. As the property owner, you are eligible for several tax deductions for long-term capital gains but none for short-term capital gains.

Are Land sales are subject to capital gains tax?

Yes, in this instance, the taxable long-term capital gains are determined by subtracting the indexed cost of the plot from the net selling proceeds from the plot's sale. Indexation is the process of modifying the purchase price of an asset for inflation, in this instance the land plot. Therefore, by considering the influence of inflation on the selling price, you may lower the amount of taxable capital gains.

Under Section 54F of the Income-tax Act of 1961, if you possess a plot and want to sell it after two years, you are only eligible for long-term capital gains tax advantages if you invest the proceeds from the sale to purchase a home within a specific time frame. However, if you own more than one home on the date of the sale of your parcel of land, you cannot claim this exemption.

Claiming Tax Exemptions

Section 54 of the Income-tax Act of 1961 provides assistance to a taxpayer who sells his or her primary residence and uses the profits to purchase another primary residence. To qualify for benefits under this provision, the following requirements must be met:

You are either an individual or a Hindu joint-family (HUF)

The sold property should be a long-term capital asset, such as a home.

You should purchase another residential property one year before or two years after selling your existing home, or build a new home within three years of selling your old home.

Exemption may only be claimed if one residential property is purchased or built in India. Even if more than one property is acquired or erected, only one will qualify for exemption under Section 54.

With effect from the assessment year 2021-22, Section 54 of the Finance Act, 2020 has been changed to extend the exemption advantage to investments made in two residential residences. No exemption may be claimed if the property is acquired outside of India. You are only qualified for the exemption for investments (buy or building) in two residential properties if your long-term capital gains are less than Rs. 2 crore.

1988's Capital Gain Deposit Account Scheme

If you are unable to purchase a second home with the capital gains from the sale of your first home, you may claim the exemption by depositing the unutilized money into the Capital Gains Deposit Account Scheme at any branch of a public sector bank.

Within two or three years, the funds from this account may be withdrawn to fund the purchase or construction of a new residence.

Bonds

If you intend to reduce your tax liability after selling your home, you have six months to invest the proceeds in certain financial instruments, such as notified bonds. This would allow you to avoid paying tax on capital gains under Section 54 EC of the Income-tax Act of 1961. The highest tax advantage allowed under this provision is Rs. 50 lakh.