Selling your house? Here's how you can save lakhs in taxes

India Today

2 days ago

If you are planning to sell a residential property, you might be worried about the tax you will have to pay on the profit earned. But there's a legal way to save a large part of this tax if you reinvest the money in the right manner.As per tax expert CA (Dr.) Suresh Surana, provisions under Section 54 and Section 54F of the Income Tax Act can help individuals and Hindu Undivided Families (HUFs) reduce or even avoid paying long-term capital gains tax, provided certain conditions are met.advertisementHere's a simple breakdown of how these exemptions work.TAX BENEFITS UNDER SECTION 54
Section 54 of the Income Tax Act allows exemption on long-term capital gains earned from the sale of a residential house or plot of land if the profit is reinvested in buying or constructing a new residential property in India.The taxpayer must invest in the new property within 1 year before or 2 years after the sale of the old property. If the new house is being constructed instead of purchased, it must be completed within 3 years of the date of sale.'This exemption can only be claimed for one residential property. However, if the capital gain is up to Rs 2 crore, the taxpayer has a one-time option to invest in two residential properties,' said Dr. Surana.But there's a lock-in period: the new house must not be sold within 3 years. If the new property is sold before this period ends, the tax exemption will be cancelled and the earlier benefit will be added to your income for that year.The exemption amount under Section 54 will be the lower of:The capital gains from the sale, orThe amount actually invested in the new house (including any amount deposited in the Capital Gains Deposit Account Scheme)From April 2023, there is a limit on how much of the new property cost can be considered for exemption. 'The investment in the new house will be capped at Rs 10 crore for claiming tax relief under Section 54,' added Dr. Surana.TAX BENEFITS UNDER SECTION 54FIf you are selling a long-term capital asset other than a residential house, such as shares, land, or commercial property, you can still claim a tax break by investing the net sale amount into a residential house. This benefit comes under Section 54F of the Income Tax Act.Dr. Surana explained, 'To get this exemption, the individual must not own more than one residential house at the time of the original sale, and should not buy or construct any other house within 2 to 3 years.'advertisementLike in Section 54, the new house should be bought within 1 year before or 2 years after the sale, or constructed within 3 years.Also, the newly bought house should not be sold within 3 years, or else the earlier tax exemption will be reversed.The exemption is calculated proportionately using this formula:Capital Gains (Amount Invested in New Property Net Sale Consideration)If the entire net sale amount is invested in a new house, then full exemption can be claimed. If only a part is invested, the exemption will be partial.However, this section also comes with a cap. 'If the cost of the new property exceeds Rs 10 crore, the amount above Rs 10 crore will not be considered for the exemption calculation,' said Dr. Surana.POINTS TO REMEMBERYou must complete the investment within the timelines given, either before or after the property sale.Keep all records and proofs of payment, agreements, and registrations to claim the exemption during tax filing.If you are unable to invest before the tax filing due date, you can deposit the amount in a Capital Gains Account under a government-run scheme to keep the tax benefit alive.advertisementDr. Surana added that while both sections help taxpayers save on capital gains tax, it is important to evaluate your eligibility and make sure all conditions are followed. 'Planning the reinvestment carefully and keeping within the limits will help save lakhs in taxes legally,' he said.For many home sellers, using Sections 54 and 54F can make a big difference in how much tax they pay. But the benefits are only available if the rules are followed properly. If you're unsure, it's always best to take the help of a tax professional.(This article is for general informational purposes only and does not constitute financial advice. Readers are encouraged to consult a certified financial advisor before making any investment or financial decisions. The views expressed are independent and do not reflect the official position of the India Today Group.)- Ends