I'm planning to sell a property to buy a new one. Will it attract capital gains tax or exemption?

I am planning to buy a new house. For this, I want to sell one of my existing properties and apply for a home loan for the remaining amount. I want to know if I will have to pay capital gains tax if I sell my older property to buy a new one? Would I get any tax exemption on this? 

Prashant Sharma

Here's what Atul Monga, CEO & Co-Founder, BASIC Home Loan

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When planning to buy a new house by selling an existing property, it is crucial to consider the capital gains tax. If you hold the property for fewer than 24 months, it is considered short-term, and the tax will be levied according to your income tax slab. If you hold the property for more than 24 months, it is considered long-term, and you will be taxed at 20% with indexation benefits.

You can also claim exemptions under Section 54 and Section 54EC of the Income Tax Act, 1961, if you sell a residential property and use the proceeds to buy or construct another one in India. Let’s look at the specifics closely:

Section 54 of the Income Tax Act exempts you from long-term capital gains if you invest your property gains in a new property. This benefit is available if you purchase a new property either one year before or two years after selling the old property, or if you construct a new house within three years of the sale of the old property. Additionally, the amount of capital gains used to purchase the new property is exempt from tax. If the entire capital gains amount is not reinvested, the remaining part is taxable as long-term capital gains (LTCG).

Section 54EC applies to the sale of any long-term capital asset. To avail of this exemption, you must invest the capital gains in specified bonds (such as those issued by the National Highway Authority of India or Rural Electrification Corporation) within six months of the sale. The maximum investment limit is Rs. 50 lakhs in a financial year, and the bonds must be held for at least five years.

Important Points to Remember:

Reinvestment in Two Properties: Recent changes allow reinvestment in two properties for capital gains up to INR 2 crore once in a lifetime under Section 54.

Capital Gain Account Scheme: If you cannot purchase or construct the new property before the due date for filing your income tax return, you can deposit the gains in the Capital Gain Account Scheme to get a tax exemption.

Documentation: Ensure proper documentation of the sale and purchase transactions. Maintain records of the sale proceeds, new property purchase agreement, and investments in bonds (if applicable).

Calculate the Capital Gains: Determine whether the gains are short-term or long-term. Calculate the quantum of Long-Term Capital Gain and potential tax liability.

Plan Your Purchase/Construction: Ensure the new property is purchased, or construction is completed within the stipulated periods to avail of the exemption. Keep proper documentation and records of the transactions and investments.

(Views expressed by the investment expert are his/her own. Email your investment queries to askmoneytoday@intoday.com. Our panel of experts will answer your queries.)