A portion of what you earn goes to the government as income tax when your total annual income falls under the tax slab.
Similarly, if you make a profit by selling an asset such as a property after holding it for more than two years, that income is also taxable, In such a situation, the profit is called Long Term Capital Gain (LTCG), which is taxed at 20.8%. However, certain discounts will allow you to save on LTCG.
A 20.8% LTCG tax is allowed on the sale of a property with indexation, so you can save some money. Indexation is a method of adjusting the cost of an asset according to inflation rates. When gains from the sale of assets are adjusted against inflation, the tax liability is reduced.
If you are planning to sell an old home, you should keep a few things in mind to avoid paying taxes on your income from the sale.
- As per Section 54 of the Income Tax Act, a person can avail tax exemption on long-term capital gains if the proceeds from the sale of a housing property are invested in the purchase of another home. But, you have to fulfill certain conditions to get LTCG tax exemption.
- The residential property you sell must be a long-term capital asset. You must have held the residential property for more than 24 months before selling it.
- If you want your capital gains to be exempt from taxes, you must acquire another residential property within two years from the date of transfer of the old house. You can also invest the capital gains in building a new residential house within three years of selling the old property to avoid paying tax.
- Section 54 also provides for LTCG tax exemption if more than one house is being bought or built after the old one is sold. However, the long-term capital gain should not exceed Rs 2 crore to avail this benefit. Also, a taxpayer can avail this exemption only once in a lifetime.
- Earlier, the benefit was available on buying or constructing only one residential property, but it was extended to more than one house from assessment year 2021-22.
If you are planning to sell your old home but do not want to invest in any other property, the money can be invested in specified bonds to save tax.
You can invest up to Rs 50 lakh in such bonds within six months from the date of sale of the old house.
you can invest In bonds issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Indian Railway Finance Corporation (IRFC), and Power Finance Corporation (PFC) to save tax on the sale proceeds of property.