Save on Income Tax by Purchasing Second Home: Rules Explained

When selling any property, equity, or mutual funds, capital gains tax must be paid on the profit. However, there are certain rules for tax savings, which grant an exemption up to Rs. 10 crores.

Under section 54 of the Income Tax Act, if you sell a house and reinvest the amount within a specified time frame (within 2 years of selling or within 3 years for constructing a new property), you may be eligible for a tax exemption.

Considerations:

When you purchased the house, its value was Rs. 20 lakhs. Now you are selling it for Rs. 42 lakhs, making a profit of Rs. 22 lakhs. After deducting 3% brokerage and cess, you’ll have to pay a 20% long-term capital gains tax on this amount. However, if you are buying a new house from the proceeds of the old one, you’ll be exempt from this tax.

You can also benefit from a Capital Gains Account Scheme.

Tax expert Sunil Garg suggests that if you file tax returns, do not use the money received from selling the house to buy a new one, but instead, deposit it into a special account under the Capital Gains Account Scheme. This money can then be used to purchase a new house within 2 or 3 years.

In this scenario, you won’t be able to save capital gains tax.If you buy one house, you can avail exemption on capital gains.

Any profit from selling an old house, not used for reinvestment in a new property within 3 years, will result in forfeiture of benefits under section 54, and you will have to pay the entire long-term capital gains tax.

If you are buying a house in India, you may be eligible for an exemption under section 54. However, no exemptions will apply to any property purchased outside the country.

How much tax do you need to pay?

According to income tax laws, if you sell a property within three years of purchase, the profit earned will be considered Short Term Capital Gains (STCG). This amount will be added to your total income and taxed according to your tax slab.

If you are buying a property and holding it for 3 years before selling it, the profit will be considered Long Term Capital Gains (LTCG). You’ll be taxed at a rate of 20.8% after indexation benefits (as the value of the asset increases over time).