Selling Your House? These Six Tips Can Help You Save Lacs

Last Updated at: Nov 23, 2020
In September, 2020, the BMC has proposed a complete waiver in the increase of property tax rates for one year.  According to the amendment in the Mumbai Municipal Corporation Act, the revision in the assessment of property tax is for a period of every five years, which is due in 2020. As per reports, the property tax was due for an increase by 40%.  The proposed waiver, if approved at a general body meeting, will benefit over 2.83 lakh property owners.


‘There is no such thing as a good tax’

-Winston Churchill

While Winston Churchill may have said this decades ago referring to another country’s tax laws, the same holds true in almost every part of the world. People buy and sell houses all the time, and the state earns a share from the gains made. But not many are aware that there are tax provisions that can help you cut the tax payable to nil or a substantially reduce the amount charged to tax. While demonetization may have slumped the real-estate prices, there is no denying that there is an ever-increasing demand for housing. If you’re thinking of selling your house property, the following may help you save lacs of rupees:

  1. Maintain records of all constructions done over the years: This is perhaps the most important piece of advice as my tax professor once remarked. People often undertake major or minor repairs but do not retain bills. The government allows you an indexation of the property based on the number of years that have elapsed since you purchased it. This also holds true for any value addition to the property. So let’s say you constructed a small out-house or a floor on your terrace adding a few lacs of worth to the sale value of the property, three years ago. A crucial fact here is that prices of cement, labor, and other inputs would have increased since then. So the tax department allows you a higher cost advantage on the same, by computing (using a price index) how much the construction values in today’s terms. So for example, if the sale value of your house is 20 lacs, while you purchased it at an indexed cost of 15 lacs and constructed a floor worth 3 lacs, out of the 5 lacs gain (difference between the sale and purchase value), you get a further reduction of 3 lacs, bringing your total tax payable as capital gains to just 2 lacs.
  2. Hold your property for at least 3 years: This is one of the most common ways of avoiding payment of a short-term capital gains tax (taxed based on the slab you fall under and can be as high as 30%) which is significantly higher compared to a long-term tax (which is 20 %). Holding your property for less than 36 months categorises your house property as a capital asset held for short-term and hence the various deductions, indexation advantage, etc., are not applicable.

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  1. The 1-2-3 Rule: The easiest way to manage your capital gains earning is knowing the specific investment advantages provided in the Income Tax Act, which we’d like to call the 1-2-3 rule, here the numbers signify the years.
  • 1 Year – You purchase another house one year prior to the sale of your house-property. Please note that the house has to be purchased one year before your actual sale date.
  • 2 Years – You purchase another house within two years of selling your house-property.
  • 3 Years – You construct a new house within three years of selling your house-property.
  1. Knowing the catch: Like all good things come with a price, there are several catches you need to be mindful of before you apply the 1-2-3 rule. The advantages of these rules are available only if you satisfy the following conditions:
  • The new house purchased or constructed should be situated in India.
  • You must not own more than one residential house, apart from the new house purchased/constructed on the date of selling your previous house property.
  • You must not sell this new house within three years of purchase or construction. Otherwise, the exemption amount is reversed and added to your tax liability for the current year, that too as short term capital gains.
  • In case you plan on constructing a new house within three years, the gain proceeds have to be invested in a specific bank account maintained with a public sector bank or other banks approved as per the Capital Gains Accounts Scheme, 1988, for this purpose and you may not utilise it for any other purpose other than for construction of house.
  • To claim full exemption, all of the capital gains have to be invested for this purpose. This means that if you gain 5 lacs from selling the property, the entire 5 lacs need to be invested in purchasing/constructing new house property. Any amount not so utilized will be subject to long-term capital gains tax.
  1. Setting off another long-term loss: If in the last eight preceding years, you have incurred a loss instead of a gain, that is selling a capital asset (not necessarily a house) at a price below its cost, you can set off that loss against the gain accruing from the house property.
  2. Buying Bonds: If you’re the type who’d like to stay away from the hassles of maintaining another house property after you’ve disposed off one, investing in bonds is the perfect solution. The Income Tax Act provides specific bonds, issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation Limited (RECL). However, you can only invest up to 50 lacs in any financial year in these bonds. Another condition is that the amount has to be invested within six months of sale of property and investment needs to be made before the return filing date. (This is so because earlier, people often scheduled their sale of property towards the end of March, to avail 50 lacs exemption in one financial year (let’s say ending 31 March, 2014) and another 50 lacs in April to fall under the next financial year, reaping a total benefit of 100 lacs, which the Income Tax did not provide for. So now, the amount needs to be invested in entirety before the return filing date of one financial year).

We hope that the above mentioned guidelines help you plan your tax obligation better. Please note that these apply specifically to sale of housing property only. There are provisions for sale of land and other capital assets, which are not dealt with in this article. It is also advisable to consult a Chartered Accountant to help you with the exact computations to plan your overall taxes, that you can easily access with a touch through Vakilsearch’s interactive platform.