Capital Tax gain : Things to Take Care Of!

May 14, 2011     Posted under: Home Loan






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A Capital Tax Gain (CTG) is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower rate. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. If you sell your house property and earn capital gains through the deal, then you liable to pay capital gain tax. Capital gains are taxed differently depending on whether the investment is considered a long-term or a short-term. The timing of sale of your residential property can be a important factor in determining the overall tax cost arising on sale of the asset.

Differential Tax Rate Based on the holding of asset criterion

If you sell a flat within 36 months of buying it, then the gains are added to your income for that year and taxed @ 30.9% whereas if the property is sold after three years, a lower capital gains tax @20.60% would be applicable. Thus holding property for a long period not only gives appreciation benefits but can bring a substantial tax saving due to the differential tax rate.

Benefit Of Indexation

The benefit of indexation of the purchase cost, i.e., the adjustment to the cost regard to Cost Inflation Factor, is available only where an asset is held for a period exceeding 36months. In other words, you would lose complete benefit of indexation factor if the property is sold before ‘3’ years of its purchase. The benefit of indexation is calculated by multiplying the cost of property with the Cost Inflation Index (CII) of the year of sale and dividing the result by the CII of the year of purchase.

100% tax exemptions on transfer of residential property held for more than 36 months

You may claim exemption of tax on transfer of house property by investing the sale proceeds in purchase of a new house. This exemption may be lost where the house property is held for a period less than ‘3’ years. It is also worthwhile to note that the new house should not be sold before ‘3’ years of its purchase, otherwise exemptions claimed earlier would be reversed in the year in which the new house property is transferred.

Additional taxes on sale of property before five years

Another property consideration to keep in mind while selling the loaned house property is that if you have claimed benefit of deduction on the principal amount of loan repayment in the earlier years, then the sale of property before five years would have additional tax implication in your hand as the earlier exemptions are availed by you would be reversed in the year of sale.

Interest cost on loan property

The other factor to consider while selling a house property purchased on loan is that the Interest on borrowed capital accumulated during construction period to the extent not claimed as deductible expense from house property can become a dead cost if the house is sold within the period of ‘5’ years of obtaining the possession.

Depreciation and capital losses

The depreciation arises on account of wear and tear for using an asset. This is an allowance that can be claimed as deduction on construction cost of house property, provided the house property is used for business purposes.

Note: If you can defer your selling decision to a period after three years or further extend to five years, you may find greater tax saving in addition to rising of your property cost with appreciation.

NitiN Kumar Jain

Nitin works in an IT MNC professionally but blogs and owns NKJ Live. He is also the co-owner of a professional start-up ARGHAM BYTES

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  • Cmjuneja

    what if i sell a house property made out from borrowed funds within three years…

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