Avoid Capital Gains Tax on Property Sale in 2022

What is Capital Gains Tax on Property Sale?

Capital Gains Tax on Property Sale in India is levied based on the time the seller held the property. If the seller had owned the property for more than two years before selling it, then the profit would be long term. On the other hand, a short term capital gain would have occurred if the seller had owned the property for less than two years before selling it.

Keep in mind:
Regardless of whether the capital gain is long or short term, the advance tax must be paid during the year.
– Short term capital losses from the sales of an asset might be offset by either a long term or short term capital gain realized in the same year.

How To Save Capital Gain Tax On Property Sale?

1. Purchase or build a residential property
When an individual sells a residential property, they are eligible for a tax exemption on long-term capital gains under Section 54 of the Income Tax Act of 1961. This exemption is only available if the profits from the sale are used to buy or build another residential property. Remember that this exemption only applies to assets held for a long period (in our case, immovable properties with a holding period of more than two years).

To obtain this exemption, the following conditions must be met:

  • One year before selling the original property or two years after selling it, the seller must purchase a residential property of their own.
  • If you want to use the proceeds from the sale of another property to finance the construction of a new home, the work must be finished within three years of the date the original property was sold.
  • The recently built home must be located in India.
  • The exemption will be revoked if a freshly constructed or purchased property is sold within the first three years after its purchase or construction, regardless of which came first: the purchase or construction of the property.

2. Deposit into an account designated for the accumulation of capital gains
Finding a suitable property to reinvest your capital gains, arranging all the necessary funds, and completing the essential paperwork can take time. As a result, if you have not been able to reinvest your capital gains in a new property by the date of filing your income tax returns, you may invest these gains in a ‘capital gains account’ in any branch of an authorized bank (excluding rural branches of such banks) such as Bank of Baroda, as per the Capital Gain Accounting Scheme, 1988. This deposit qualifies for a capital gains exemption.

Suppose the deposited amount is not used within the specified period of two years (in the case of new residential property purchase) or three years (in the case of new residential property construction). The deposit will be treated as a short-term capital gain in the year the specified expires.

3. Invest the money in bonds with capital gains potential
Suppose you do not want to reinvest your capital gains from selling your property into a new residential property or building another one. In that case, you can invest your profits in ‘Capital Gain Bonds’ under Section 54EC of the Income Tax Act. These are also recognized as ’54EC bonds’ and are one of the most common ways to save on LTCG tax.

Several conditions must be met:

  • The bare minimum for purchasing 54EC bonds is Rs 10,000, while the maximum purchase is Rs five hundred thousand via 500 such bonds.
  • Eligible bonds under Section 54EC can only be issued by the Power Finance Corporation Limited (PFC), the National Highways Authority of India (NHAI), the Rural Electrification Corporation Limited (REC), and the Indian Railways Finance Corporation Limited (IRFC).
  • These bonds cannot be sold or given to another person, and they come with a lock-in period that lasts for five years (beginning in April 2018).
  • 54EC bonds have an annual interest rate of 5%. This interest, however, is taxable.
  • Such bonds must be purchased within six months of the sale of the property. Furthermore, the investment must be made well before the tax filing deadline.

Exemptions From Capital Gains On Sale Of Property As Per The Law

According to the Income Tax Act, if you purchased any other property within one year of selling the capital gains from the sale of the property, you can use the value of this purchase as an exemption and deduct the same against the consideration of the sale to calculate your capital gains. So, if the asset’s weight exceeds the payments on the deal, you can avoid paying capital gains entirely. However, there were some conditions.
This new property must be held for a minimum of three years. If you sell this property less than two years after you bought it, the exemption you took advantage of on capital gains will be revoked, and you won’t be able to take the deduction. Capital gains are subject to capital gains tax retrospectively.

You may be eligible for an exemption from the capital gains tax if the proceeds from the sale of the property are invested in any other property or construction project within two years of the date the property was sold. However, the condition applies in this case. For the capital gains exemption to be valid, the new property must be held for at least three years.

TDS On Sale Of Property

TDS is applicable regardless of whether the capital gain is long or short-term. TDS is an abbreviation for Tax Deducted At Sources and refers to a deduction made by the buyer when paying the seller. The buyer makes the balance payment to the seller after deducting TDS.

TDS is not a new type of tax; rather, it is a type of tax that is paid in advance and has the potential to be adjusted with the total tax liability computed at the end of the year while filing an income tax return. TDS rates differ depending on whether the seller is an NRI or a resident, as explained below:

  • If the seller is a resident, 1% TDS will be deducted if the property value exceeds 50 lakhs.
  • A tax withholding equal to twenty percent of the property’s value will be withheld if the seller is not a country resident. Cess and surcharges would be levied in addition to the 20%.


What kinds of income are taxed as "capital gains"?

Under the heading “Capital Gains," the government taxes any profit or gain from selling an investment asset during the year.
You must fill out which form to get money out of a capital gain account.

Rule 9 of the Capital Gain Account Scheme, 1988, explains how to leave the program:

1. Taking money out of Account A
After the initial deposit, any amount can be taken out of Account A at any time by bringing Form C and the passbook to the deposit office.
For any withdrawal from Account A other than the first one, a depositor must send in two copies of Form D.

2. Withdrawal from Account B

If a depositor wants to take money out of Account B, they must move the funds from Account B to Account-A and then take the money out in the same way as Account-A. Rule 7 of the Capital Gain Accounts Scheme, 1988, explains how a deposit account can be moved or changed.

If a depositor has money in deposit account B and wants to move it from deposit account A to deposit account B, they can use Form B and the information from deposit account A to make a request. If the depositor hasn’t already set up deposit account A, they must do so before sending Form B.

What are the rules for figuring capital gains when an asset is given away, left in a will, or transferred in some other way?

When someone sells the worth of an asset money, they make a capital gain. In Section 47, the word “transfer" is not used to describe certain transactions. Because of this, transactions covered by section 47 are not considered a “transfer," so there is no capital gain. Section 47 talks about a few big deals, like transferring capital assets by gift, will, or other means. So, if one person gives their capital asset to another, the first person will not make any capital gains because of the transaction.

If the person who gets the capital asset as a gift, through a will, or in some other way transfers it, he will get a capital gain. There are rules in place that help figure out how much the person who receives an asset as a gift, through a will, or in a similar way will have to pay capital gains taxes. In this case, the cost of buying the capital assets will be the same as what the previous owner paid for it, and the length of time the capital asset will be held will be calculated from the date the previous owner bought it.
Section 56 has different rules about how gifts are taxed in the hands of the person who gets the advantage.