By Lovaii Navlakhi

You bought a property purely as an investment, and now, you want to sell it. This is a fine plan, but remember, there's something called capital gains, on which, you need to pay income tax.

Don’t fret about parting with your money yet, because there are many ways to tackle capital gains and the tax payable. But let's first understand what the terms mean.

Capital gains, explained

There are two categories as follows:

Short-term capital gain: If you are selling a property that you have held for less than three years, it will be treated as short-term and added to the income of that year. You will then pay tax depending on your tax slab.

Long-term capital gain: If you held the property for three years or more, the property can be classified as a long-term capital asset and the tax rate would be 20%, after indexation. There are tax exemptions available to you on the long-term capital gains made. In this case, your options to save tax would be:

1. You'll be eligible for tax relief if you buy another house within two years of the sale, and the capital gains made to the extent of the amount invested in the new property is exempt from tax. The remainder, if any will be taxed at the long-term capital gains tax rate (see box in page 2).

2. Invest in capital gains bonds issued by the Rural Electrification Corporation or National Highways Authority of India within six months from the date of capital gains.

However, there is a ceiling of Rs 50 lakh per person within a financial year for such investments; and there is also an overall limit on the institutions issuing these bonds – the bonds are available only on first-come, first-served basis.

What else you need to know

1. If you reinvest in a plot, you need to purchase it within two years of sale of the original property. You will get another year for construction of the house on the plot purchased, but the construction has to be completed within three years of the sale.

2. If you want to buy an apartment, the time limit is two years from the date of original property sale.

3. Park the gains in a capital gains bank account with a nationalised bank within the date of filing returns in which the capital gains have accrued. This amount along with the accumulated interest needs to be utilised for purchase of a property within two years of the sale date.

Continued in page 2