If you are a property owner looking to sell your ownership, it is crucial to consider all aspects related to the sale process in order to maximize your capital gains. Whether you are selling the property as an investment or are in need of capital, it is important to take into account the taxation components of the sale before signing the agreement to sell property.
In fact, a lot of financial consideration goes into chalking out the sale agreement of property, especially regarding the taxation aspects. If you are relocating, you may want to ensure that you gain the maximum benefit possible from the sale of your property, while also minimizing the amount paid in taxes.
Thus, it is important to understand the taxation aspects from the Government’s viewpoint when considering how to sell property without incurring an excessive tax burden. By doing so, you can ensure that your property sale proceeds smoothly and that you obtain the best possible outcome.
Who Levies Tax on Sale of Property?
When a property is sold, the seller is liable to pay taxes to both the central and state governments. These taxes are levied under different heads and are either borne by the buyer or the seller. It is important to understand the various taxes involved in the sale of property to ensure compliance with the regulations.
Which Taxes are Applicable on Sale of Property?
When you sell your property, you may have to pay certain taxes as follows:
Capital Gains Tax
Capital Gains Tax is a tax that you need to pay on any profit that you make from selling the property. The amount of Capital Gains Tax that you need to pay depends on how long you have owned the property. If you have owned it for more than three years, you will pay 20% of the profit as tax. If you sell it within three years of owning it, then the tax will be calculated based on your income tax slab.
TDS
TDS is a tax that the buyer needs to pay on your behalf while buying your property. This tax is 1% of the total sale value and is deposited with the Income Tax department. This tax is applicable only if the value of the transaction is 50 lakhs or more.
Indirect Taxes on Selling Property
As a seller, you may collect certain taxes from your buyers that need to be paid to the government. However, these taxes are actually paid by the buyers, not the sellers themselves. It is important that you ensure the buyers pay these taxes to you, so that you can deposit them with the government. These taxes are known as indirect taxes.
Service Tax
Service Tax is a tax that you need to pay on under-construction properties. The rate of this tax is either 3.75% or 4.5% depending on the area of the property and the transaction value. The buyer pays this tax to you, and you deposit it with the government. You don’t need to pay this tax if your property is already constructed.
VAT
VAT is a tax that is levied by the state government. Some states charge VAT on the sale of under-construction properties, while others do not. The tax rate and applicability depend on the state where your property is located.
Remember, you may have to pay some or all of these taxes when you sell your property.
Details Required to Deposit TDS While Selling a Property
When selling a property, you need to deposit TDS and provide the following details:
- PAN card of buyer and seller
- Residential address of buyer and seller
- Residential status of the seller
- Address of the property being sold
- Agreement date
- Payment date
- Transactional value
- Amount paid
One can pay TDS through either online or offline mode. To make an online payment, navigate to the Income Tax Department’s online portal and complete the 26QB form. Alternatively, visit the nearest bank branch to fill out the form. In the case of an NRI selling a property, Form 27Q must be filled out.
Important Things about TDS on Selling a Property
When selling a property, it’s important to keep a few things in mind to ensure a smooth transaction:
- The seller must provide the buyer with a PAN Card to obtain Form 16B.
- It’s also important to verify the annual Form 26AS to ensure the correct amount is being paid.
- If TDS payments are not made on time, penalties may be levied by the authorities.
How to Save Tax on Property Sale?
It is possible that you have calculated the total tax on the sale of your property and found it to be a significant amount. In this scenario, you may be curious about ways to reduce the tax burden on the sale of your property. Understanding if there are any measures you can take to ensure a reduction in tax deduction is essential. The government has provided certain exemptions and rebates that can help you achieve this goal, which we will elaborate on below.
Saving Tax on Property Sale by Reinvesting in House or Plot
As per Section 54 of the Income Tax Act 1961, individuals and HUF can avail tax-saving benefits on the Capital Gains or profit earned. One of the most commonly used methods to save tax is by investing the gained amount in another property within a period of three years from the date of sale. However, this form of investment can only be made once in a person’s lifetime.
In the following examples, we will take a detailed look at how this process works and the different investment options available to you.
Example 1
Priya bought a lovely property back in 2015 for INR 50,00,000/- and recently sold it in 2020 for Rs. 70,00,000/-. Since she held onto the property for more than 3 years, it’s considered a long term capital asset.
Now, you might be wondering – how can Priya save tax on the sale of her property? Well, she’s eligible for tax benefits under section 54 if she invests in a new property in one of the following ways:
- Purchase a new property one year before the sale of the old property, that is in the year 2019.
- Purchase a new property after two years of the sale of the old property, that is in the year 2022.
- Construct a new property or buy a plot within 3 years, that is by the year 2023.
And you know what’s great? Priya can even acquire two residential properties and still avail exemption on both, as long as the cost does not exceed 2 crores of both properties combined.
Example 2
Hey there! I have some information that might interest you. Sushil recently sold a property that he had purchased back in 2010 for 1 crore. He made a profit of 2 crores as he sold it for 3 crores in 2021. The good news is that he can invest that money in two residential properties of 1 crore each for tax benefits.
However, if he decides to sell the property for 7 crores with a capital gain of 6 crores, he can still save tax up to 2 crores by investing in two residential properties worth 3 crores each. Please note that he can only claim tax benefits for one of the residential properties.
Capital Gain Account Scheme (CGAS) for Sale of Property
If an individual is unable to immediately invest their capital profit into constructing a house or investing in property, they may opt to park the profit amount in a Public Sector Bank under the Capital Gains Account Scheme (CGAS). However, this is only a viable option if they are planning to invest in another house in the near future. It’s important to keep in mind that there is a limited window of 3 years to make such an investment, failing which the parked sale amount will be taxed at 20% along with a 3% cess for long-term Capital Gain.
As per assessment year 2020-21, the exemption benefit is applicable for the purchase of up to 2 residential properties up to INR 2 crores. As per Section 54, the exemption benefit does not extend to the purchase of shops or commercial properties.
Investing in Bonds (54EC) on Sale of Property
The Income Tax Act, 1961 provides taxpayers with an opportunity to save on taxes when selling property by utilizing Section 54EC. It’s important to note that this option only applies to long-term capital gains. By investing in specified financial assets, taxpayers can protect their hard-earned capital gains from taxation. The investment must be made in notified bonds issued by the National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) within six months of acquiring the amount.
It is important to keep in mind that taxpayers are only allowed to invest a maximum of INR 50 Lakhs in these bonds in each financial year. Additionally, there is a 3-year lock-in period when investing in these bonds. Transferring the bonds or taking a loan against them within three years of investing will result in the taxpayer being charged capital gains tax. Therefore, careful consideration must be given before making this investment.
Conclusion
When you’re ready to sell your property, you don’t want to lose a big chunk of your profits to taxes. So, while you’re figuring out the best way to sell your property and finding the right buyer, take some time to look into ways to reduce your tax burden. Remember to keep these points in mind before you sign any agreements to sell your property.
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