Steps to Lower Capital Gains Tax on Property

The government has enacted several measures that have helped keep the economy's real estate market active and vibrant. Property sales are subject to taxation, the amount of which is determined by how long you have owned the property before the sale. As a result, sellers, who typically earn the largest profits from real estate transactions, must pay a capital gains tax. Here's a breakdown to help you get a handle on it and provide you with ways to save capital gain tax on property.

What Are Capital Gains On A Property?

A capital gain is any profit or gain made through the sale of a "capital asset," which is simply any item considered to be an asset. Since this is income, it must be taxed in the year of the capital asset's transfer. This is known as "capital gains tax on property, " which applies to both long-term and short-term gains. Since there is no sale and merely a change of ownership, capital gains do not apply to inherited property. Inheritance and bequests are specifically exempt from taxation under the Income Tax Act. However, if the inheritor decides to sell the asset, they will be subject to capital gains tax.

Here Are The Two Different Kinds Of Capital Gains On Real Estate.

Short-Term Capital Gains Tax: If you sell an asset for a profit less than two years after you bought it, you'll have to pay STCG (short-term capital gains) tax.

Long-Term Capital Gains Tax: If you sell a property after holding it for more than two years and you make a profit, you will be subject to long-term capital gains(LTCG) tax rates.

How To Adjust And Minimize Capital Gains Tax

When you sell a home, the capital gains tax you must pay is usually in lakhs. But you can save capital gain tax on property significantly by employing one of these strategies:

You may qualify for Section 54F exemptions when acquiring or constructing a home

It is common practice for people to sell their previous residence to fund the purchase of a new one. Under Section 54F, you can avoid paying capital gains tax if you buy a replacement property with the proceeds from the sale of your old one, provided you satisfy the following requirements:

• You purchase a new home one year before selling your old one.
• You purchase a new home within two years of selling your previous home, or you build a new one within three years.
• You will lose your tax breaks if you try to sell the new house before the three years are over. Here, the three-year period begins on the purchase or construction completion date for a new home.

Right now, only one home falls under Section 54F's purview. It lets you sell a non-residential property to buy a residential property. There is no need to pay capital gains tax on the property if all of the profits are put toward the acquisition of the new property. The Section 54F exemption is perfect for those selling a home to buy another one.

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Section 54EC lets you buy Capital Gains Bonds

Those who sell a property but don't plan to invest in another home with the earnings can take advantage of capital gains bonds.

Here are some of the characteristics of capital gains bonds:

• Buying these bonds can save you from paying taxes on capital gains. You can avoid paying capital gains tax on the proceeds from a property sale entirely by reinvesting in these funds.
• The yearly yield on these bonds is only 5%-6%, which is significantly lower than the returns available on fixed deposits.
• You have to put that money to work within six months of the property's sale.
• There is a five-year commitment required. These bonds will automatically be redeemed after five years.
• These bonds are not transferable or tradable in any way.
• AAA-rated capital gains bonds offer a high level of safety for investors.
• Capital gains investments cannot exceed Rs 50 lakh.
• The bonds are available in both physical and electronic (Demat) formats.

Investing in a Capital Gains Accounts Scheme

Buying a new residential property could take some time. It can take a lot of time to find a place you like, negotiate with the seller, and finish the paperwork involved in buying a house or apartment. If you're stressed out, opening a capital gains account can provide some comfort. You can put the money you made from selling a home into a capital gains account at any public sector bank or other bank recognized by the Capital Gains Account Scheme of 1988.

Long-term Investing

The capital gains tax is the lowest for long-term stockholders who successfully identify and invest in excellent companies. However, it is simpler to say than to execute. Business conditions might change over time, and there are a variety of scenarios in which you might desire or need to sell sooner than you had planned.

Get The Most Out Of Tax-Deferred Retirement Plans

A 401(k), 403(b), or individual retirement account (IRA) allows you to invest for the future without having to pay taxes on the earnings of those investments until retirement. There is no capital gains tax to pay when you buy and sell investments from your IRA.

Take The Use Of Capital Losses To Balance Out Gains

You can use a loss on one investment to offset the gain on another, lowering your effective tax rate. Imagine that you have two investments, one of which has increased in value by 10% since you purchased it, while the other has decreased in value by 5%. If you sold both investments, the loss on one would decrease the amount of capital gains tax you would owe on the other. Of course, in a perfect world, all of your investments would increase in value, but losses sometimes occur, and this is one method to gain from them.

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Conclusion

One of the drawbacks of selling real estate in India is having to pay capital gains tax on property. However, if you use one of the strategies mentioned above, you can keep from having to fork out a hefty sum in capital gains tax. Learn about the different tax exemptions you can use and choose the one that works best for you. Adani Realty is the place to go for anyone looking to make a fresh investment in real estate in India.