How To Save Capital Gain Tax On Sale Of Residential Property 2023-24?
Investing in real estate is a sure-shot way of increasing your net worth no doubt. But when your investment comes to fruition and has appreciated well beyond your expectations, you’re thinking of selling it to capitalize on your investment. Who wouldn’t? But when you do find a buyer and decide to sell the residential property, you might lose a large chunk of your profits in the form of taxes, if you’re unsure how to navigate effectively.
The Government of India is aware that long-term capital gains taxes are a huge burden for individual investors. But nonetheless, it is an essential component of the taxation system of India as it ensures a seamless functioning of revenue collection by the government which helps it better govern the economic prospects of the nation.
To ensure that investors do not lose interest entirely with respect to the land and real estate markets, the Government of India has continued to create exceptions that benefit investors in this domain. In this article, let us understand the ways in which your profits from the sale of residential properties can be saved by reducing or alleviating the tax burden that’s inherently associated with such transactions.
Avenues for Saving CGT
Section 54 and Section 54F
Section 54 and Section 54F help individuals save tax by giving them a specified timeframe in which they can reinvest their entire profits from the transaction of capital assets.
But what constitutes a capital asset?
Any financial asset that can appreciate in value with time constitutes a capital asset. This includes Jewelry, Bonds, Equities, Properties, etc. So, when a capital asset is sold for a profit, the gains from the transaction are subjected to taxes.
In order to incentivize Indian individuals to still engage in such transactions, the income tax department has come up with the Section 54 exception. Under this, when the property is sold, if the entire capital including the gains is reinvested in another new property in India, then the Long Term Capital Gains taxes are exempted.
Similarly, the Exception from Section 54F works for all other financial assets excluding the residential property deals. Under this, the gains from the sale of any other capital modes, if reinvested into a new residential property, are exempted from the taxes that the sale of the capital asset incurred.
Are You Eligible?
If you want to be eligible to apply for this exemption, here are the checkboxes for it.
The date of the new property that you have purchased should be within one year from the sale of your capital asset.
If you are selling the capital asset first in order to procure a new residential property in India, then the date of purchase should be within two years from the date of capital asset sale.
There’s also a stipulation that the newly acquired residential property must be held for a minimum period of three years for the exemption to be valid.
While individuals and Hindu Undivided Families are eligible to make use of these exemptions it is noteworthy that privately held companies, corporations, and LLCs cannot apply for this.
So, how much savings in tax can one look forward to using these sections?
Well, an impressive 10 Crores!
What’s the difference?
Under Section 54, it’s important to remember that if you don’t invest the entire capital gains obtained from the sale, the remaining amount becomes liable for taxation as long-term capital gains.
On the other side of the coin, we have Section 54F. This provision takes a slightly different approach. It offers a proportional exemption based on your investment. To qualify for this tax exemption, you must invest the entire sum received from selling the original asset, which includes both the cost of purchase and the profit. If you don’t invest the full sale proceeds, don’t worry; Section 54F is still on your side, granting you an exemption in proportion to your investment.
Objectives of these Exceptions
The Government of India wants to maintain a positive investor sentiment with these tax exemption rules. Here’s how it captivates individual investors and lets people grow their net worth through real estate reinvesting
1. Tax Savings that Translate to Wealth Appreciation!
Imagine this: Reinvesting your capital gains into a residential property under Section 54F, not only helps you save on taxes but also supercharges your wealth-building pursuit!
With immediate tax savings in your pocket, you now have extra resources to invest, acquire other capital assets, and achieve financial prosperity quickly.
2. Acquire Real Estate Equity.
By investing your capital gains into a residential property, you’re essentially grabbing a piece of the real estate pie. As that property appreciates over time, your equity in it grows hand in hand. Real estate has a reputation for being a reliable asset in any investment portfolio and has withstood the test of time.
3. Shielding Your Wealth from Inflation
We all know inflation can erode the value of our money. But guess what? Residential property has a track record of outpacing inflation. As property prices rise in the face of inflationary pressures, those who’ve wisely parked their capital gains in residential properties get to ride the wave of value appreciation.
