How can I avoid paying capital gains tax on the sale of a home?

In India, property owners must pay capital gains tax on the sale of residential property. The reasoning behind the capital gains tax on residential property sales – the sale of property often leads to profits for the owner.

What is capital gain?

The growth in the worth of an asset through time is referred to as capital gain. This capital gain is generated by the owner when the asset is sold. The discrepancy between the selling and purchasing prices of an item is referred to as capital gain.

Factors that influence capital gains tax on property sales

According to former American President, late Theodore Roosevelt, “everyone who invests in well-selected real estate, in a rising portion of a successful city, takes the surefire and healthiest route of becoming independent, for real estate is the foundation of prosperity.” As a result, capital gains tax is charged on residential property sales. The following factors influence the capital gains tax on property sales:

  • Property costs

Property costs encompass both the money being spent on acquisition (covering brokerage fees, stamp duty, and registration fees) and the money spent on rehabilitation and refurbishment. Thus, if a home was purchased for Rs 50 lakh and then renovated for Rs 20 lakh, the total worth of the property for tax purposes would be Rs 70 lakh.

  • Payment in cash for property improvement

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has decided that property sellers who invest money in house improvements might include this amount while calculating their capital gains tax obligation on property sales. In this instance, Komal Gurumukh Sangtani filed the ITAT after the assessment authority declined to allow a deduction for property improvement costs while calculating capital tax liabilities. When such payments are paid in cash, the taxpayer must demonstrate that no unaccounted money was utilized to pay the bill. To claim tax relief, he will also have to justify the origin of the financial payments made for the renovation works.

  • Capital gain waiting period

The holding period – the duration you own the property before selling it – is a deciding factor in assessing tax obligation under present Indian IT regulations. If the law considers the transaction to be a short-term capital gain (STCG), the tax liability will be larger. If the transaction fits within the long-term capital gains (LTCG) classification, you will be taxed on 20.8% of the profit. Regardless of your tax bracket, the 20.8% LTCG tax applies. Another key point to remember is that a taxpayer is entitled to various refunds under the rules of the IT Act if the transaction is classified as LTCG. In the case of STCG, the opportunity to reduce the tax burden is essentially non-existent – the taxpayer may only offset the gain against any short-term loss from the sale of assets such as stocks and gold, etc.

  • Purchase of new property

If you reinvest the sales profits of the old property into a new one within a set time frame and according to certain restrictions and circumstances, your tax burden will be significantly reduced, if not $0.

What to forgo when selling a home

In your best interests, the transaction should be notified to the tax authorities, and all dues should be paid on time. You don’t want to get trapped in a legal bind later on.

In rare cases, the buyer may demand on paying a portion of the transaction using unexplained methods. While it may assist you in saving money on taxes, it also implies that your property’s registered value will be lower. You may have to face a loss if you sell it in the future.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. PropertyPistol does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.


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