Are you questioning the impact on your taxes after the federal government's recent change in the capital gains tax regime for real estate? Well, house owners will now have the option 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 considerable monetary transaction, however it is very important to understand that it may also draw in capital gains tax. However, there are several strategies you can utilize to decrease the tax burden and conserve more of your hard-earned cash. In this article, comprehend what is capital gains tax on residential or commercial property and check out various approaches to save 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 enforced on the revenue made from selling an asset. When you offer a residential or commercial property for more than its purchase cost, the difference between the selling rate and the cost of acquisition is thought about as capital gain. This gain goes through tax according to the dominating tax laws in India.

Different Kinds Of Capital Gains

There are two kinds of capital gains: short-term (STCG) and long-lasting (LTCG). The period of holding determines whether the gain is short-term or long-term.

Short-term Capital Gains (STCG): Residential or commercial property offered within 2 years of acquisition is taxed at 20%. Long-term.

Capital Gains (LTCG): Residential or commercial property sold after holding it for more than two years is dealt with as a long-term capital gain. Currently, LTCG on residential or commercial property sales is taxed at a flat rate of 20%, with indexation advantages offered 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 among the co-owners based upon their ownership share. This enables each co-owner to use their fundamental exemption limitation and potentially lower the overall tax liability.

Mr. and Mrs. Patel jointly own a residential or commercial property that they purchased 10 years ago for 40 lakhs. They choose to offer it for 1 crore. Since they are equivalent 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 restoration expenses, can be subtracted from the price when determining capital gains on residential or commercial property sales, lowering the taxable capital gains.

Mr. Gupta offered his residential or commercial property for 60 lakhs. However, he incurred expenses such as brokerage charges, legal charges, and marketing expenses totaling up to 2 lakhs, which can be deducted from the price. As an outcome, the list price is 58 lakhs.

3. Holding Period

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

4. Availing Indexation Benefit

When you sell a house after holding it for a minimum of 2 years, you can take advantage of the indexation advantage. Indexation adjusts the purchase expense of the residential or commercial property to represent inflation, which effectively decreases the quantity of capital gains and consequently the tax on it.

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

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

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

- The entire sale profits must be reinvested to avail complete exemption. If only the capital gain is reinvested, then the exemption is given proportionally.

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

Apart from selling a house, if you sell any other property and utilize the proceeds to obtain a new house, you can claim an exemption under Section 54F.

- Similar to the conditions mentioned above, the new house must be bought either one year before or 2 years after offering the possession. Moreover, it ought to be built within 3 years of offering the property.

- It is very important to keep in mind that while claiming this exemption, the seller ought to not have more than one domestic property, omitting the recently acquired one.

7. Tax Loss Harvesting

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

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

8. Buying Bonds (Exemption under Sec 54EC)

Under Section 54EC, you can minimize capital gains tax on residential or commercial property by buying defined bonds issued by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). The investment needs 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, prepares to invest this amount in NHAI bonds within six 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 choice to reinvest their long-term capital gains from the sale of a house into shares of a qualified business engaged in manufacturing activities.

10. Purchasing Capital Gain Account Scheme (CGAS)

Consider investing in the Capital Gain Account Scheme (CGAS) to claim exemption. However, it is essential to note that the transferred quantity in CGAS should be used within three years; otherwise, you will be responsible to pay tax on that amount.