Selling your property but don't want to invest in another? Here's how you can reduce LTCG outgo

Property is one of the most valuable assets one may hold. But, there could be huge income tax liability when you sell it. However, there are multiple ways to save good amount of income tax. One option is to reinvest the gains into a new property. But, what if you don't want to do it? There is a way out. Before we come to it, let's understand the applicability of short-term capital gains (STCG) and long-term capitals gains (LTCG) tax on selling a property:

STCG, LTCG applicability

If you sell the property before holding it for two years, you will pay the STCG tax on it. The gains that you incur by selling the property are added to your income of the concerned financial year. You need to pay tax as per your applicable income tax slab. However, if you sell a property after holding it for two years or more, you need to pay LTCG tax at the rate of 20 per cent after the indexation benefit.

For instance, if you had purchased a property in June 2008 at the price of Rs 50 lakh and sold it in June 2019 at Rs 1.5 crore, you need to find the indexed cost of acquisition of the property to calculate the capital gains amount.

The cost inflation index was 137 in 2008, which has now risen to 289 in 2019. It means that the cost has gone up by 2.109 times. If we apply the same in our example, the indexed cost of acquisition of the property goes up to 1.054 crore. By deducting this indexed cost from your net proceeds of Rs 1.5 core you get the capital gains amount of Rs 44.52 lakh.

If you have to pay a tax of 20 per cent on this amount, you end up paying Rs 8.9 lakh as capital gains tax. If your holding period is longer, then even after indexation the tax liability remains higher considering high property prices. This is why everyone looks for ways to minimise the tax outgo as much as possible.

How to reduce LTCG tax liability?

People who do not want to re-invest their sales proceeds in other properties can choose the bond route provided under section 54EC of the Income Tax Act. "Under section 54EC, one can invest the amount of capital gains earned from the sale of a long-term land or building, in the NHAI bonds or bonds issued by rural electrification corporation of India within six months from the date of transfer," says Archit Gupta, Founder and CEO, Cleartax.

It is to be noted that only capital gains can be invested in bonds, not the entire proceeds of the sales. "The maximum amount permitted for such investment is Rs 50 lakh and lock-in is five years," says Gupta.

In the above example, the capital gains (Rs 44.52 lakh) is less than Rs 50 lakh limit, so the seller can invest the entire capital gains amount in one of the specified bonds or both, thus reducing the tax liability to nil.

At present, one can apply for RECL and NHAI bonds to save LTCG tax under section 54EC. Both these bonds are AAA-rated by the rating agency CRISIL. The minimum investment amount in these bonds is Rs 10,000. These bonds have been giving an annual interest rate of 5.75 per cent and interest is paid annually. No TDS is deducted on the interest income. However, the interest income is taxable in the hand of the depositor. After the completion of five years, you can walk away with complete tax-free money.

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