How to Save Long-Term Capital Gains Tax from Property in India?

Two years after selling his property in Delhi, Rajiv Sen received a notice from the Income Tax Department for defaulting on long-term capital gains tax (LTCG).

Receiving that dreaded summons from the IT department is something that is the stuff of nightmares. And it was the beginning of one long nightmare for Rajiv Sen.

But wait. Don’t blame Rajiv just yet. Unless one is a seasoned investor, it is quite possible to ignore the technicalities of LTCG tax.

If you too are planning to sell your property, make sure you are well-versed with the norms of long-term capital gains tax.

To make things simpler for you, we have listed everything you will ever need to know about capital gains tax.

Let’s begin with the classic definition

In simple words, when you sell a property, you earn a certain profit, which is taxable. Now, based on the holding period of the property, the tax incurred on this profit falls under short-term and long-term categories.

So, when should I pay long-term capital gains?

Until 2017, any immovable property which was held for more than three years was considered as a long-term capital asset, and any gain arising from its transfer was treated as a long-term capital gain.

“But after the Union Budget 2017-18, the holding period for the long-term capital gains bracket was reduced to two years.”

What are the tax rates?

For short-term capital gain tax, you are taxed as per your tax slab. However, for LTCG, you are taxed at 20%.

Are there any ways to save LTCG tax?

While the short-term capital gain tax is unavoidable, there are several ways to save tax on the long-term capital gains. The three most common ones are:

1) By investing in another property

One of the most popular ways of saving tax on capital gains is investing in another property. You will be exempted from paying any tax if you invest the entire amount (sale proceeds) in another property. However, there are certain things that you should keep in mind.

These include:

• You should invest in property within one year from the sale date or construct a property within two to three years from the sale date
• You should not sell this property within three years of purchase or construction
  This property must be in India
• You should not own more than one residential property on the date of transfer

Is it possible to just invest a portion of sale proceeds in buying another property?

Yes.

“In case the entire capital gains are not invested within the time specified under section 54, 54B, 54F, 54GB, etc. then the balance unutilised amount should be deposited in a separate bank account called capital gain account on or before the due date of return filing (July 31) as applicable to the taxpayer,” informs Chetan Chandak, Head- Tax Research, H&R Block India Pvt.

2) By investing in the capital gains account scheme

One of the easiest ways to save tax is to deposit your gains in a public-sector undertaking bank, or other banks as per the capital gains account scheme.

However, you must invest this money within the period specified by the bank.

3) By investing in bonds

If you are not comfortable with the above two options, here’s the third one.

You can also invest in bonds issued by the National Highway Authority of India or Rural Electrification Corporation to save tax.

Pro tip: These bonds should be purchased within six months from the date of transfer. Though these bonds earn you an interest of 5.25% per annum, your investment in these bonds will be locked for five years.

Research, research, and research

All said and done, it is important to carefully analyse the pros and cons of each tax-saving method before finally deciding one. You must also factor in the return on investment aspect.

After all, just to save tax, you don’t want to end up investing in a property that doesn’t reap you any returns.

“Before investing in property to save tax, you also need to analyse the transaction costs such as stamp duty, goods and services tax, brokerage charges, etc. Sometimes, it may make sense paying the taxes and investing the gains in high yielding instruments such as equity or mutual funds,” explains Chandan.

It is always advisable to consult a tax professional to be on the safer side.