Important Tax Matters When You Are Selling the Property

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 in respect of property.

#1 – Section 80C and your house loan

Most of the people tend to know about only one aspect of Section 80C, that is, if you have taken a house loan the amount paid as instalment is eligible for 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 benefit availed in the previous years under this head would be reversed. The deduction claimed for repayment of house 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 house 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 the there is no reversal to the deduction availed on interest paid on house loan. Thus, even if the tax payer sells his house within 5 years of acquisition, there would be no additional tax burden under this section.

#3 –  What is your holding period?

Holding period is very important for computing the nature of gain. If a residential property is owned for a period of more than 3 years from the date of possession then it is considered as Long-term capital gain. Whereas, if the holding period is less than 3 years then it is considered as Short-term capital gain. It is always advised to place under capital gains under Long-term as the tax burden is less. So, in case the period is less than 3 years, one should wait for some time. The applicable rate of tax burden under Long-term capital gain is 20%.

#4 – Section 54 and reversal of tax benefits

Paying taxes on long-term capital gain on sale of residential property can also be avoided. This benefit can be claimed only in case of long term gains not for short term gains. This can be done when long-term capital gains are used to purchase another property (residential) within 2 years after from the date of sale. The benefit is also offered if you the tax payer had purchased a residential property one year prior to the sale of existing property. An alternative to this investment is construction of a new residential property within 3 years from the sale of earlier property.

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 long term gain of Rs.35 lakh. He purchased a new residential property for Rs.75 lakh. He can claim tax benefit under section 54. But after two years of purchase of 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. Cases where payment is being made on 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%.

Have questions? Feel free to ask us! Use the comment section to place your questions and we’ll get back to you at the earliest.

4 thoughts on “Important Tax Matters When You Are Selling the Property”

  1. I had a plot of 2500sq.ft & sold it as per the guide line price. I have not shown this property . But now i have to file my Return as a persioner .can I hold the sale money for purchase of a new property say a flat or i have to show in my annual income?

  2. I purchased a flat for Rs. 10,000,00 in 1996. Much renovation has been done ever since on the property. Recently I started investing in another flat and have not completed the payments. Meanwhile final payments and registration etc is still outstanding. Please advise –

    1. What is my Capital Gains Tax liability, should I manage to sell the flat for Rs 150,000,00 in 2017?
    2. My newer investment will be bought for Rs. 70,000,00 in total (in a smaller city) and final payment / registration anticipated in 2017. Can I claim any benefits by adjusting the returns from first property towards the second ? Initial instalments were paid by reinvesting proceeds from sale of mutual funds sold after 9 years of holding. As I am no longer working, I have no regular income and unable to get any loans.
    3. What is the most Tax efficient way of handing this issue?

    I would really appreciate your advise on this issue.

  3. Tks for info. We are three brothers having our fathers house getting sold and the cost is 52 lacs. All the three of us are submitting IT return every year. in this juncture when the 0total amount to be equally divided asper our father’s read. will. Can u tell us
    A. What TDs amt for each if us the buyer to deduct and pay to ourIT account?

  4. I purchased a vacant, registered society plot, at Hyderabad, in the year 1979-80, for Rs 1600.00. I sold it last month, for 30 laKHS. Kindly illustrate HOW TO CALCULATE CAP.GAIN TAX , for this transaction? I dont want to claim any CG exemptions.

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