Capital gains’ tax liability on selling a house

The real estate market is growing and this is evident from the hordes of advertisements in newspapers. Buying or selling a property is not just about transfer of deeds, but also about handling your capital gains' tax liability properly.

Gains realised from sale of a property held for 36 months or more are termed as long-term capital gains. In other cases, it's short-term capital gains. Long-terms capital gains are taxed at 20%, while short-term capital gains are taxed at normal rates. Here are ways to reduce your tax outflow arising from long-term capital gains:

Indexation benefit

Indexation benefit allows a taxpayer to factor in the impact of inflation while calculating the cost of acquisition. This helps increase the cost price of the asset, thereby, reducing the capital gains' amount. Indexation rates are notified by the government for every financial year. The base index rate was 100 for FY82 and the rate for current financial year, i.e., FY13 is 852. The indexed cost of acquisition is calculated as:

Indexed cost = original cost x (indexation rate for year of sale/indexation rate for the year of purchase). The indexed cost is then reduced from the sale proceeds to compute the long-term capital gains.

Reinvesting the money

In case of sale of a house property, the Income-Tax Act, 1961, provides an exemption if the amount is reinvested or utilised towards purchasing a house. As per Section 54 of the IT Act, an individual or an HUF can claim exemption by reinvesting the amount in another residential property within two years of the sale. Alternatively, if the amount is invested in the purchase of a residential property a year before the sale, or used in construction of a property within three years after the sale, the exemption shall also be available.

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