I am salaried person. I have sold a residential property for ₹1.10 Crore in the month of March 2023 which was purchased in June 2002 for ₹20 lakh. I don’t intend to buy another property immediately. Can I still minimize my tax liability on the income from the sale?.
Answer: Income from sale of any capital asset including a residential house is taxed as capital gains after deducting the cost of acquisition from the net sale proceeds. In case the house is sold after 24 months, you are allowed take indexed cost as your cost of acquisition for computing long term capital gains. In case the property is sold within 24 months, the difference is taxed as short term capital gains at the slab rate applicable to you.
Indexed cost of an asset is computed by multiplying the cost of acquisition by Cost Inflation Index (CII) of the year of sale and dividing the same by CII of the year of purchase. In your case, the cost of acquisition is ₹20 lakh and the indexed cost would be around ₹63.05 lakh, taking 105 as the CII for year of purchase and 331 CII for year of sale. The indexed long term capital gains is ₹46.95 lakh (Rs. 110 lakhs – Rs. 63.05 lakhs). The same would be taxed @ 20.80% (20% with indexation + cess 4%).
Since you do not wish to buy a residential house immediately, you can save tax on this long term capital gains by investing Rs. 46.95 lakhs in capital gains bonds of any of the specified financial institutions like IRFC (Indian Railway Finance Corporation), PFC (Power Finance Corporation), NHAI (National Highway Authority of India) and REC Ltd. within six months from date of sale of the property where one can invest maximum of 50 lakhs in a financial year. The bonds have lock in of five years. The money received on maturity of these bonds is tax-free. These bonds presently offer 5.25% interest which is taxable.
If you change your mind within six months and decide to buy property in the future, you can deposit the amount of indexed capital gain in a bank account under the Capital Gains Account Scheme (CGAS) before due date of filing of the ITR which is 31st July 2024 for salaried persons. This money can be utilized for buying a ready to move in residential house within two years from date of sale of the property or within three years for self-constructing a house or booking an under construction residential house. There would be no tax on the capital gains if this money is used to utilized as above else it will become taxable when the period of three year expires.
(Balwant Jain is a tax and investment expert and can be reached on [email protected] and @jainbalwant on his twitter handle)