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Tax relief on capital gains on real estate proposed in Budget 2017

The holding period for capital gains on sale of immovable property—land and building—to qualify as long term capital gains (LTCG) is proposed to be reduced to 2 years from 3 years in the Union Budget. Currently, capital gains on land and building qualify as long term capital gain if holding period is minimum 3 years. The base year for calculation of such capital gains with indexation benefit is also proposed to be shifted from 1981 to 2001. These steps are expected to reduce the capital gains tax burden on property sellers and thereby make movement of immovable capital easier.

“More than 10% effective savings on sale of immovable property after 2 years of purchase. Aimed at encouraging the sellers to disclose the correct sale price,” said Pinky Khanna, Director, EY, commenting on the LTCG proposal.

Currently, if a property is sold within three years of buying (acquiring) it, any profit from the transaction is treated as a short-term capital gain in the hands of the individual. This is added to the total income of the owner and taxed according to the slab rate applicable to him.

If you sell a property after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation.

Indexation takes into account the inflation during the holding period and accordingly adjusts the purchase price, thereby slashing the tax burden for the seller. There are other benefits too. The owner can claim various exemptions in case of long-term capital gains, but no such benefit is provided for short-term gains.

Expenses incurred on repairs and renovation can be added to the cost of acquisition of the house while computing long-term capital gains. Also, the interest paid during the pre-construction period of the house can be added to the cost, if not already claimed as a deduction earlier.

There are several ways to avoid paying tax when you sell a house. There is no tax to be paid on the gains, if you use the entire gain from the transaction to buy another house within two years or construct another house within three years. The two- and three-year period applies even if you bought another house a year before selling the first one. But the property should have been bought in the name of the seller.

If you are not keen to lock-in your gains from sale of the house in another property, there is another way out. You can claim exemption under Section 54 (EC) by investing the long-term capital gains for three years in bonds of the National Highways Authority of India and Rural Electrification Corporation Limited within six months of selling the house. Budget 2017 proposes new list of companies whose bonds can be used for such purpose. However, one can invest only up to Rs 50 lakh in these bonds.