Selling Your House? Here’s How to Avoid Paying a Huge Tax Bill

Selling a house is a big financial transaction. And, as a taxpayer, you must know that property sale is subject to capital gains tax, i.e., you are subject to pay on the profits you earn from the sale. While you cannot escape paying taxes on property sales, there are several strategies you can employ to reduce the tax burden and enjoy valuable savings on tax payments. In this guide, we explore different ways you can avoid paying a huge tax bill. 

 

What is capital gains tax on property?

The government imposes a tax on the profits you earn from selling a real estate property. This is known as capital gains tax on property. When you sell a house for any amount that is more than its purchase price, the difference between the selling price and the acquisition cost is in terms of capital gains. This gain is subject to tax as per the prevailing tax laws. 

 

Types of capital gains on property sale

There are two types of capital gains on property – STCG (short-term capital gains) and LTCG (long-term capital gains). The holding period of the property determines whether STCG or LTCG is applicable. 

• STCG – If you sell a house within two years of buying it, STCG is applied, and you are obliged to pay a 20% tax on the capital gains. 
• LTCG – The profits you earn from the sale of a house after holding it for more than two years are treated as long-term capital gains. Currently, LTCG is taxed at a flat rate of 20% with indexation benefits or at 12.5% without indexation benefits. 

 

Strategies to reduce taxes on property sale

• Joint ownership

If you have purchased a house on a joint-ownership basis with your family member or friend, then you can divide the capital gains earned from the sale with the co-owners based on their ownership share. This will allow each of you to use the basic exemption limit and reduce the overall tax liability. 

 

• Reduce selling expenses

When you can calculate capital gains on property, you can deduct certain expenses like renovation and selling costs and lower your property tax bill. 

For example, let us assume you sold your house for Rs. 60 Lakh. However, you incurred expenses like brokerage fees, legal charges, renovation and advertising costs, all amounting to Rs. 3 Lakh. You can deduct this amount from the sale price. So, for tax purposes, your actual sale price will be Rs. 57 Lakh, which will be taxed accordingly. 

 

• Holding period

The holding period is essentially the period for which you own the property. If you sell the property after two years from the date of purchase, you can qualify for LTCG, which is typically lower than STCG. 

 

• Indexation benefit

When you sell your house after two years from the date of purchase, you can take advantage of the indexation benefit available to you. Indexation adjusts the property’s cost of purchase to account for inflation. This effectively lowers the capital gains you get from the sale of the house and, therefore, the taxes payable on the gains. 

 

• Buy a new property

Another effective way to reduce your taxes on property sales is to reinvest the capital gains to purchase another residential property. The long-term capital gains from the sale of a house are exempted from taxes under Section 54 of the IT Act, provided you meet the following conditions:

• You use the capital gains to purchase or construct a new house
• The new house is purchased one year before or two years after the sale of the old property
• You construct the new house within three years from the date of the sale of the old house
• The tax exemption is limited to the purchase or construction loan of only one house
• The property you purchase is located within the national borders of India
• The cost of the new property is less than the sale amount

 

• Invest in bonds

If you don’t want to re-invest the capital gains from the sale of a house to purchase or construct a new home, you can consider investing them in bonds. By investing in bonds issued by the government, you can avail of tax exemption. However, to claim this benefit, you must invest in a bond within six months from the day of completing the property sale. 

 

• Invest in shares of company in manufacturing sector

One of the lesser-known tax provisions is the Section 54GB. Under this Section, if you reinvest the capital gains from the sale of a house into shares of eligible companies engaged in manufacturing activities, you can get a tax exemption. The limit for such reinvestment is Rs. 50 Lakh.

 

Conclusion

Selling a house is a big financial decision, and as a seller, it is paramount that you plan your finances wisely so that you can save on your capital gains tax and reduce your overall tax burden. Apart from using the above tips to avoid paying a huge tax bill on the sale of a house, you can also save a lot of money on home loan interest payments by choosing the right lender. 

If you are looking for a home loan, you can consider applying for home loan with reputed lenders like India Shelter, which has a reputation for offering loans at affordable interest rates. A lower interest rate directly translates to a lower EMI, allowing you to easily manage the repayment without compromising on your other financial goals.