While selling a house, you are assessed to be a responsible citizen to pay tax depending upon the duration for which you had the ownership of such house. If the tenure of ownership exceeds 3 years, you shall be liable to pay long-term capital gain as taxation liability else, you shall be required to pay short-term capital gain. However, here are few tax saving ways following which you can save your tax after selling your house.
Reinvest in Specified Bonds
You can save tax on selling a house by investing in specified bonds. The amount arising as capital gain can attract exception under Section 54EC if invested in the Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI) bonds within six months of the sale of the property. But there is cap of ₹50 Lakh for a locking period of 3 years and any amount beyond ₹50 Lakh, will attract the capital gain tax. In case these bonds get redeemed before 3 years, the amount shall be liable for capital tax.
Reinvesting in a Property
If an Individual or an HUF is liable to pay a long-term capital gain on a sale of a residential property, such liability can be zero-in with the investment of such amount into another residential property within 2 years from the sale of property or 1 year prior the sale. But the exemption is not applicable if any other asset other than residential property is being purchased. Under Section 54, the exemption shall also be withdrawn if the purchased property is sold within 3 years of its purchase.
You can lower your burden of tax liability with the help of indexation. Indexation is basically a technique for making inflation adjustments to the tax payments basis price index. It helps in maintain the purchasing power of the individuals. A property bought 10 years ago, if sold today will attract a long-term capital gain basis the cost in the year of purchase. So, the cost is indexed by using formula – Purchase Price * (Price Index in the year of Sale/Price Index in the year of Purchase) and then capital gain is assessed by deducting the Indexed Cost of acquisition from the selling price. Hence, this is one of the best ways to save tax on selling a house.
So, these specific provisions under Income Tax Act will help you to shrink your tax liability on the gains arising out the sale of your property.