In India, the Income Tax Act offers myriad benefits to aspiring property owners. For example, when you sell certain capital assets like gold, mutual funds, and shares to buy a residential property, you can avail of capital gains tax exemption.
In this article, we will answer the common investor question – can I enjoy tax benefits on capital gains if I buy another house? Before we explore this topic in detail, we must understand terms like capital gains tax and long-term capital gains (LTCG) tax.
Capital gains tax
When investors sell their capital assets like stocks and shares, jewelry, vehicles, or land at a price higher than their purchase price, they profit. These profits are called capital gains.
Capital gains are of two types: short-term and long-term. When an investor makes a profit on the sale of equity shares and bonds held for more than one year (12 months) or property older than three years (36 months), it is referred to as long-term capital gains.
Unlisted and foreign shares have to be held for no less than two years for profits from their sale to be categorized as LTCG.
Profits from selling debt mutual funds may be considered LTCG if the assets have been held for at least three years.
Long-term capital gains tax
Short-term capital gains do not enjoy tax exemptions. By contrast, as per the Income Tax Act guidelines, long-term capital gains may be tax deductible.
One good way to avail of long-term capital gains tax exemptions is to use the money to purchase or build a residential property.
Taxable gains accumulated by selling the following assets only – diamond or gold jewelry, equity or debt mutual funds, bonds, and shares (Indian, foreign, or unlisted) can be safeguarded by transferring them to a Capital Gains Account Scheme (CGAS), helping to reduce the tax burden by up to 20%.
When purchasing a new house through the Capital Gains Account Scheme, capital gains are exempt from taxes if used to buy the house within two years or construct one within three years.
Let us understand this better with an example. An owner of a successful Indian start-up sells a portion of his company shares for Rs. 10 crores and transfers the entire amount to a CGAS. After one year, he withdraws eight crores and purchases a house.
He will have to pay taxes on only the remaining two crores. Simply parking the gains in a CGAS is not enough. You have to transfer the complete funds to a capital gains account with a bank.
For example, if you bought shares worth Rs. 2 lakh and made a profit of Rs. 50,000, you have to transfer the entire amount (principal + gains), i.e. Rs. 2.5 lakhs in a CGAS. The money can be withdrawn from the CGAS by filling out Form C.
Under the Income Tax Act of 1961, the following are the preconditions to availing the CGAS tax exemption benefits:
- On the day of the sale, you should not own more than one property.
- The money withdrawn from CGAS can be only used to purchase residential property. You cannot use it to buy commercial property or land.
When availing of the tax exemptions granted by the CGAS, you must buy the property and file your returns within the timeframe to enjoy said benefits.
For instance, if you sold your shares and transferred all the funds to CGAS in October 2020, you would have two years to buy a residential property to avail of the tax exemptions until October 2022 before filing your returns in 2022.
To enjoy the tax benefits, you must buy the property by 31st July 2022 (non-audited) and not 31st March 2023. According to section 54 (F), to enjoy the tax exemptions under the CGAS, you cannot resell the property before three years.
Selling your property before three years will undo the tax benefit completely. In addition to the tax, you will also have to pay the interest and penalty on the LTCG, calculated from the date of the sale.
Individuals, such as a married couple, can jointly own shares and still avail of this tax exemption. For example, a couple who realized profits from the sale of jointly owned shares transferred all the proceeds to CGAS and, after the stipulated time, bought two separate residential properties, will enjoy the same tax benefits as a single individual.
Availing tax benefits by transferring gains from the sale of shares to a CGAS and buying a residential property can be a win-win for those who make intelligent financial decisions.
On one hand, they can save a substantial portion of their hard-earned money and invest in a valuable asset they can sell off later at a premium or generate regular income through lease or rent.
I wish to sell off a portion of my share portfolio and buy a residential property with the proceeds. Can I enjoy any tax benefits from this transaction?
Yes, you can. Transfer the complete funds (principal + gains) to a Capital Gains Account Scheme (CGAS). Money parked in CGAS is exempt from taxes if they are used to purchase residential property within two years or build one within three years.
Are there any preconditions to enjoying these tax benefits?
Yes. On the date of sale of shares, you should not own more than one property. Also, the property you buy can only be residential. It cannot be land or commercial property.
Is there a waiting period before I can resell the property?
Yes. After realizing the tax benefits, you must hold the property for at least three years. If you sell the property before three years, you will have to pay the complete tax, including the penalty and interest on the LTCG, calculated from the date of the sale.
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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.