Are you questioning the effect on your taxes after the government's recent modification in the capital gains tax regime for real estate? Well, house owners will now have the choice of 2 tax rates on long-lasting capital gains: a 12.5% rate without indexation or a 20% rate with indexation advantage.

Selling a residential or commercial property can be a significant monetary deal, however it is very important to understand that it might likewise bring in capital gains tax. However, there are numerous methods you can use to lower the tax problem and conserve more of your hard-earned money. In this short article, comprehend what is capital gains tax on residential or commercial property and check out different techniques to save money on capital gains tax when offering 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 imposed on the revenue made from offering a possession. When you offer a residential or commercial property for more than its purchase rate, the difference between the market price and the expense of acquisition is considered as capital gain. This gain goes through tax according to the prevailing tax laws in India.

Different Types of Capital Gains

There are two kinds of capital gains: short-term (STCG) and long-lasting (LTCG). The duration of holding determines whether the gain is short-term or long-lasting.

Short-term Capital Gains (STCG): Residential or commercial property offered within two years of acquisition is taxed at 20%. Long-term.
Capital Gains (LTCG): Residential or commercial property sold 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 readily available or at 12.5% without indexation advantages.


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 allows each co-owner to utilize their standard exemption limitation and possibly reduce the total tax liability.

Mr. and Mrs. Patel jointly own a residential or commercial property that they acquired 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 between them - 30 lakhs each.

They can declare exemptions approximately 1.25 lakhs each, totalling to 2.5 lakhs on their respective gains, for tax savings and lowering their total tax liability.

2. Reducing Selling Expenses

Certain selling costs, like restoration costs, can be deducted from the sale cost when determining capital gains on residential or commercial property sales, reducing the taxable capital gains.

Mr. Gupta sold his residential or commercial property for 60 lakhs. However, he sustained expenses such as brokerage costs, legal charges, and advertising costs amounting to 2 lakhs, which can be subtracted from the sale cost. As an outcome, the price is 58 lakhs.

3. Holding Period

Holding a residential or commercial property for more than 2 years can qualify you for long-lasting capital gains tax rates, which are normally lower than short-term rates.

4. Availing Indexation Benefit

When you sell a domestic property after holding it for a minimum of two years, you can make the most of the indexation advantage. Indexation changes the purchase expense of the residential or commercial property to represent inflation, which effectively lowers the quantity of capital gains and consequently the tax on it.

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

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

- Firstly, you need to acquire a new residential or commercial property either one year before or 2 years after selling your existing residential or commercial property. Alternatively, you can construct a brand-new residential or commercial property within 3 years of offering your previous one.
- The whole sale profits must be reinvested to get full exemption. If just the capital gain is reinvested, then the exemption is given proportionally.


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

Apart from offering a home, if you offer any other asset and use the profits to obtain a brand-new house, you can claim an exemption under Section 54F.

- Similar to the conditions pointed out above, the new house should be bought either one year before or more years after selling the asset. Moreover, it ought to be constructed within 3 years of offering the property.
- It is necessary to keep in mind that while declaring this exemption, the seller ought to not have more than one home, omitting the newly gotten one.


7. Tax Loss Harvesting

Losses from sales of or shares can be utilized to balance out capital gains on residential or commercial property sales to minimise your tax liability.

Ms. Sharma sold some shares of a business at a loss of 3 lakhs. She had likewise just recently sold a residential or commercial property, sustaining a capital gain of 10 lakhs. By offsetting the loss from the shares against the gain from the residential or commercial property, her taxable capital gain would be reduced to 7 lakhs.

8. Purchasing Bonds (Exemption under Sec 54EC)

Under Section 54EC, you can minimize capital gains tax on residential or commercial property by buying specified bonds provided by National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC). The financial investment requires to be made within 6 months from the date of sale.

Example:

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

9. Reinvesting Gains into Shares of Manufacturing Companies

Under Section 54GB of the Income Tax Act, individuals have the alternative to reinvest their long-lasting capital gains from the sale of a home into shares of an eligible business participated in production activities.

10. Buying Capital Gain Account Scheme (CGAS)

Consider investing in the Capital Gain Account Scheme (CGAS) to declare exemption. However, it is very important to note that the deposited amount in CGAS ought to be used within three years; otherwise, you will be responsible to pay tax on that amount.