Capital gains are the profit that an investor makes on selling a capital asset at a price higher than the purchase price. Within the realm of real estate, when one sells a property at a price higher than the purchase price, he is said to have obtained capital gains. Under Section 54 of the Income Tax Act (1961), capital gains are taxable. However, in some cases, capital gains enjoy the benefit of indexation to reduce the impact of inflation.

One can easily calculate capital gains online with details like the purchase price, sale price, number of units, purchase details, sale details, and investment details. In normal circumstances, the tax is levied upon the profits from the sale of a short-term capital asset and a long-term capital asset.

In real estate, a short-term capital asset is a property which is held by an individual for not more than 36 months preceding the date of its transfer. If someone sells the property under three years and makes a profit on the sale, then the profits or Short Term Capital Gain (STCG) will be taxed directly as per the income slab of the taxpayer. For instance, if the taxpayer falls under the tax slab of 30%, the STCG will also be taxed at the same rate. In case of these capital gains,

• One can adjust/reduce the sale consideration on the basis of any brokerage/commission paid
• One can deduct any expenditure made on the construction/improvement of the house
• One cannot avail the benefit of indexation

A long-term capital asset is a property which is held by an entity for a period exceeding 36 months before its transfer, be it an individual or a HUF. Under Section 54F of the act, the Long Term Capital Gains (LTCG), if invested in the purchase or construction of a new house, are exempted from capital tax under certain conditions:

• If one purchases a house within a year prior or two years after the transfer of the original property
• If the under-construction property for which LTCG are being used is completed within three years from the date transfer of the original house
• If the new property, in which the money is invested in, is situated in India
• If the taxpayer does not own more than one residential house, other than the new one, on the date of transfer
• If one does not purchase another house apart from the new one within two years or construct a residential house within three years

If one invests in a new house using the LTCG, and still has some gains left, then the remaining will be taxable at 20%. With the sale of one property, one can invest in only one new asset and not in multiple acquisitions.

Other ways of utilising LTCG to save tax

Capital Gains Accounts Scheme

One can reduce capital gains tax by investing their LTCG in special Capital Gains Accounts Schemes (CGAS). Under this scheme, they have to invest their money for a period specified by the bank. If they fail to keep the money locked in for the period, it will be treated as capital gain and will become taxable. Taxpayers can avail two kinds of CGAS:

• Deposit Account Type A: Here, the gains are deposited in the form of savings. Taxpayers who want to construct a house in stages prefer such a scheme type.
• Deposit Account Type B: This account functions like a term deposit; it is payable after a fixed time duration. Withdrawals from such an account can be made only after a stipulated duration

Taxpayers must clarify the kind of scheme opted for while filing their tax returns. Any amount withdrawn from CGAS accounts have to be used within two months for a specific use to avail tax exemption. The interest generated through CGAS accounts is taxable; TDS is deducted as per rules.

Capital Gains Bond

If one uses their LTCG to purchase a Capital Gains Bond, the tax is exempted under Section 54EC of the act. The tenure of these bonds is fixed at three years. One cannot withdraw money invested in these bonds before three years from the date of investment. The minimum investment for these bonds is Rs.20,000. These bonds can be held in either Demat or in physical form, and cannot be used as collateral while obtaining loans. Lastly, these bonds are issued by Rural Electrification Corporation of India (REC) and National Highway Authority of India (NHAI) at an interest rate of 6%. The interest income generated from these bonds is taxable.