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How to Save Capital Gains Tax On Residential Or Commercial Property Sales

Are you questioning the effect on your taxes after the federal government’s recent change in the capital gains tax regime genuine estate? Well, property owners will now have the choice of two tax rates on long-term capital gains: a 12.5% rate without indexation or a 20% rate with indexation benefit.

Selling a residential or commercial property can be a significant financial deal, however it is very important to comprehend that it might likewise attract capital gains tax. However, there are numerous strategies you can use to decrease the tax burden and save more of your hard-earned money. In this short article, comprehend what is capital gains tax on residential or commercial property and explore different techniques to save money on capital gains tax when selling 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 troubled the profit earned from selling a property. When you offer a residential or commercial property for more than its purchase price, the distinction in between the selling price and the cost of acquisition is considered as capital gain. This gain is subject to taxation according to the prevailing tax laws in India.

Different Kinds Of Capital Gains

There are 2 kinds of capital gains: short-term (STCG) and long-lasting (LTCG). The duration 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 offered 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 available or at 12.5% without indexation benefits.

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 amongst the co-owners based upon their ownership share. This enables each co-owner to use their basic exemption limit and possibly decrease the total 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 sell it for 1 crore. Since they are equivalent co-owners, they divide the capital gains similarly in between them – 30 lakhs each.

They can declare exemptions as much as 1.25 lakhs each, totalling to 2.5 lakhs on their particular gains, for tax savings and minimizing their total tax liability.

2. Reducing Selling Expenses

Certain selling expenses, like renovation expenses, can be deducted from the price when calculating capital gains on residential or commercial property sales, lowering the taxable capital gains.

Mr. Gupta sold his or commercial property for 60 lakhs. However, he incurred expenses such as brokerage charges, legal charges, and advertising expenses amounting to 2 lakhs, which can be subtracted from the sale cost. As a result, the sale rate is 58 lakhs.

3. Holding Period

Holding a residential or commercial property for more than two years can certify you for long-lasting capital gains tax rates, which are generally lower than short-term rates.

4. Availing Indexation Benefit

When you sell a domestic property after holding it for at least two years, you can take benefit of the indexation benefit. Indexation changes the purchase cost of the residential or commercial property to represent inflation, which successfully lowers the amount of capital gains and subsequently the tax on it.

5. Buying a Brand-new Residential Or Commercial Property (Exemption under Sec 54)

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

– Firstly, you require to buy a brand-new residential or commercial property either one year before or 2 years after offering your existing residential or commercial property. Alternatively, you can build a new residential or commercial property within three years of offering your previous one.

– The whole sale profits need to be reinvested to get full exemption. If just the capital gain is reinvested, then the exemption is granted proportionally.

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

Apart from selling a house, if you offer any other possession and utilize the earnings to acquire a brand-new domestic home, you can declare an exemption under Section 54F.

– Similar to the conditions discussed above, the brand-new house needs to be acquired either one year before or more years after offering the property. Moreover, it should be constructed within 3 years of selling the asset.

– It is necessary to keep in mind that while claiming this exemption, the seller should not have more than one domestic property, excluding the freshly obtained 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 business at a loss of 3 lakhs. She had also just recently offered a residential or commercial property, sustaining a capital gain of 10 lakhs. By balancing out the loss from the shares versus the gain from the residential or commercial property, her taxable capital gain would be reduced to 7 lakhs.

8. Investing in Bonds (Exemption under Sec 54EC)

Under Section 54EC, you can save on capital gains tax on residential or commercial property by purchasing specified bonds released by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). The financial investment needs to be made within six months from the date of sale.

Example:

Mr. Kumar, after incurring 30 lakhs in long-term capital gains from selling his flat, prepares to invest this quantity in NHAI bonds within 6 months and declares an exemption of 30 lakhs.

9. Reinvesting Gains into Shares of Manufacturing Companies

Under Section 54GB of the Income Tax Act, people have the alternative to reinvest their long-term capital gains from the sale of a house into shares of a qualified business participated in manufacturing activities.

10. Buying Capital Gain Account Scheme (CGAS)

Consider purchasing the Capital Gain Account Scheme (CGAS) to claim exemption. However, it is essential to keep in mind that the deposited quantity in CGAS should be utilised within three years; otherwise, you will be liable to pay tax on that quantity.