If you are planning to sell your house, timing it right for commissioning the actual sale or execution of documents, will ensure that you do not miss on income tax benefits coming along.
In India, profits on sale of assets are treated differently depending on the holding period of the asset being sold. The assets are classified into two categories based on holding period, short-term and long-term. The profit on sale of the house is treated as long-term, if the house has been held for more than 36 months prior to the date on which it is being transferred. The long-term capital gain is also granted concession under income tax act.
Whereas short-term capital gains on sale of your house is treated at par with your other income and there are no reinvestment options available here.
Let’s see what factors will impact the sale of the property:
If you have acquired the house with a home loan or any other loan and have claimed the tax benefits under Section 80 C in respect of loan repayment, stamp duty and registration charges etc. then these deductions will be treated as your income if the house is sold within a period of five years from end of the financial year in which possession of such property was taken by you. Thus it will become taxable in the year in which you sell the house.
However there is no such provision for taxing the tax benefits availed by you for interest claimed in respect of the house property. So if you are on the threshold of the time limit of five years then you can plan it in such a way that you do not loose the benefit already availed.
Capital gains exempted earlier:
In case you had acquired this property by claiming exemption for reinvestment of capital gains on sale of your house earlier, you need to retain the property for a minimum period of three years under Section 54, otherwise the capital gains so exempted earlier shall be taxed in the year in which you sell the new property.
Likewise if you had purchased this house and had availed the tax benefit of reinvestment of capital gains which arose on sale of assets other than residential property under Section 54F and you have not completed three years or more from the date of its purchase, the capital gains not taxed earlier will be taxed as long- term capital gains in the year in which you are selling your house.
Stamp duty valuation:
Before you enter into an agreement, it is important to verify the stamp duty valuation of the property in question which is in accordance with ready reckoner released by the Government for the purpose of stamp duty payment. As per Section 50 C of the Income Tax Act, in case the sale consideration as per the agreement is lower than the value considered for the purpose of stamp duty valuation, there is a presumption that the stamp duty valuation shall be treated as consideration for the purpose of computing the capital gains.
Since payment of stamp duty is normally borne by the buyer and buyer may not mind paying extra money for stamp duty if he likes the property, you as seller might not appreciate the hardship of this provision till your assessing officer proceeds to tax you on the difference between the stamp duty valuation and the money you actually received as per the sale deed. It is advisable that you consult your tax advisor before you mention the value of consideration in the agreement so that you do not face the music later.
Exemption of capital gains earned by reinvesting:
Now in order to ensure that you do not pay tax on the profit on sale of the house property being sold now, you can reduce your tax liability on sale of your house property by reinvesting your capital gains. You can avail tax exemption in respect of long-term capital gains in case the capital gains of sale consideration are reinvested within a specified time limit.
You can claim the benefit of exemption of reinvestment of capital gains if you have either already purchased a house within a period of one year before transfer of this house property. You can also buy a house within a period of two years from date of sale of this property.
Alternatively you can construct a house within a period of three years from the date of transfer of this property which will be exempt under Section 54 of the Income Tax Act. But there is a catch. In case you are not able to utilize the amount of capital gains for purchase or construction of your house property before due date of filing of your income tax return, then you have to deposit the amount of capital gain, which you intend to invest, in a fixed deposit with a bank under Capital Gains Account Scheme, 1988. You can withdraw the money from this account for the purpose of payment for purchase or construction of the house. In case you are not able to purchase the house within the period of two years or construct it within the period of three years, the non utilized portion of the capital gains becomes taxable in the year when the requisite period gets over.
In addition to the option of investing in residential house, you can also invest the capital gains arising on sale of house property in bonds of specified Companies like National Highway Authority or Rural electrification Corporation or other infrastructure bonds as specified in Section 54 EC.
Now you know that by just timing your house sale, you get entitled to so many tax benefits.