Tax Implications When Selling a House

Tax Implications When Selling a House: People are always keen to find themselves their first home. For this purpose, they work tirelessly day-in and day-out. However, before one buys or sells a house there are certain tax implications that needs to be taken care of. Without prior knowledge about applicable tax liability, house owners and sellers can find themselves into tax debt. One usually makes an investment in house property for selling it on a high price to make a profit. But this can lead to capital gain. So, without any further delay let us take a look into the tax implications when you are selling your residential house.

#1 – Section 80C and your Home Loan

It is a very important to tax implication you should know when selling your residential house. Most of people tend to know about only one aspect of Section 80C, that is, if you have taken a home loan the amount paid as an instalment is eligible for a deduction of INR 1, 50, 000 (upper cap) per financial year. You’ll be shocked to know that there is also another aspect to it. As per the provisions of the Income Tax Act, if a person sells the same property within 5 years from the date of possession then all the tax benefits availed in the previous years under this head would be reversed. The deduction claimed for repayment of a home loan under section 80C is assumed to be the income of the person and the taxpayer will have to reassess the deduction under house loan repayment and pay taxes on the same.

#2 – Section 24 has no effect on tax liability

Section 24 deals with the provisions of interest paid on home loan. Like Section 80C, this section also offers a deduction to the tax payer, but in respect of payment of house loan interest. An extended benefit of this section is that there is no reversal to the deduction availed on interest paid on a home loan. Thus, even if the taxpayer sells his house within 5 years of acquisition, there would be no additional tax burden under this section. So you must keep in mind section 24 when you are selling your residential house.

#3 –  What is your holding period?

When you are selling a residential property, you should check whether you are getting short-term or long-term capital gains. The holding period of the residential property determines the answer. The holding period is very important for computing the nature of gain. If a residential property is owned for a period of more than 2 years from the date of possession then it is considered a long-term capital gain. Whereas, if the holding period is less than 2 years then it is considered a short-term capital gain. It is always advised to place capital gains under Long-term as the tax burden is less. So, in case the period is less than 2 years, one should wait for some time. The applicable rate of tax burden under Long-term capital gain is 20% plus cess.

#4 – Section 54 and reversal of tax benefits

There are certain conditions that need to be met in order to ensure that long-term capital gains on the transfer of residential houses (including self-occupied houses) to an individual or a HUF are exempt from tax.

• If you purchased another residential house one year before the date of the sale.
• If you will purchase another residential house within 2 years of the date of sale or transfer.
• If you will construct another residential house within 3 years of the date of sale or transfer.

However, if you are selling the newly acquired property within 3 years, then the deduction would be reversed.

Example: Mr.A sold a house property resulting in a long-term gain of Rs.35 lakh. He purchased a new residential property for Rs.75 lakh. He can claim tax benefits under section 54. But after two years of purchasing of a new property, he sold the new property for Rs.85 lakh. In this case the tax relief under section 54 earlier claimed will be reversed as the Mr.A sold the house within 3 years of the purchase of new property.

Reversal will be done by reducing the cost of purchase of house i.e. cost of purchase while calculating the capital gain on sale of new residential property will be Rs.40 lakh (75 lakh- 35 lakh). Thus, the capital gain arising on sale of new residential property will be Rs.45 lakh (85 lakh-40 lakh). The gain will be short-term capital gain.

#5 – Tax deduction at source (TDS) on Property Sale

This area is a concern for people who are selling their property. Section 194-IA states that if the sale value of a residential property is equal to or greater than INR 50, 00, 000 then 1% TDS is required to be deducted from the total sale amount. In cases where payment is being made on an instalment basis, the property buyer would be required to deduct TDS on every instalment. Remember the TDS is to be deducted on the entire consideration, not on the amount over and above Rs.50 lakh. If PAN Card is not furnished by the seller, then the applicable rate of TDS would be revised to 20%.

Check TDS Rates Chart A.Y. 2023-24

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