Treatment Of Income from Sale Of Residential Property, as per Income Tax ACT.

Example: Lakshmi Aunty is trying to sell her ancestral property – a piece of land worth nearly Rs 10 crores in today’s market. Being a senior citizen, she has put her son Rahul in-charge to dispose off the asset. To be eligible for tax exemption, John was advised that he needs to invest in another property within a year. Still confused, he has approached a financial advisor to help him out with the nitty-gritties .


Buying property for investment purposes and selling it later at a higher price has become a common habit. There is an aspect of these transactions which deals with the tax on the profits gained, which the seller needs to be aware of. If you sell real estate for a profit, you will need to pay capital gains tax on the money. The tax varies, depending on the time period the property was held on to.

Capital gains tax is definitely an aspect which every property seller should consider in a cost-sensitive market. The sale of a property involves short-term capital gains tax if it was sold before the completion of three years of purchase. The tax authorities will consider the profit you generated by the property sale as regular income for that year and apply tax accordingly. If the property was sold after three years of its purchase having elapsed, long-term capital gains tax at the rate of 20 percent after indexation becomes applicable.

The gains from this asset is added to the investor’s income and taxed as per the income slab he falls under. For example, if an investor falls under the tax slab of 30 percent, the gain will also be taxed at the rate of 30 percent. The tax on this type of gain is not eligible to any type of exemptions.

When it comes to long-term capital gains, which occurs when you sell a house after a period of three years, tax calculation involves what is known as indexation. The acquisition cost of the asset is recalculated based on indexation, which factors inflation in its calculation by using the Cost Inflation Index.

The benefit is that the tax on a long term capital gain is taxed only at a 20 percent rate after indexation. This brings down the amount of tax payable considerably as compared to the short-term capital gain tax. Apart from this, you might be able to avoid paying tax on the sale of the house, and you also have options for reducing the tax burden following the sale of real estate.

In India, a common procedure that is followed is to sell the property at an under-valued rate to a friend or relative or in pieces to save on the tax component, making such transactions sources of black money. There are provisions in the Income Tax Act, which can help you in taking necessary actions to avail the exemptions available.


The Income Tax Act exempts the capital gains from the sale of a house if the taxpayer invests the gains in a residential property within two years from the date of sale or constructs another house within three years from the date of sale. This means, you cannot invest in a commercial property or land to save tax – you have to necessarily buy residential property only. If the property is under construction, the two-year period is further enhanced to three years. However, you should not own more than one house, besides the house you are investing in.


There are instruments like capital gain bonds, in which the profit arising from the sale of a property can be invested. These have a lock-in period of three years and the maximum limit for investing in such instruments is Rs 50 lakhs. These bonds are currently being issued by NHAI and REC. If the entire amount of long term capital gains is invested in these bonds, the tax is fully exempted. Investments of any lesser amount will grant a proportional deduction. The money can be withdrawn after three years.


Now, if a property has not been identified and purchased before the return has been filed or before the due date for filing the tax return, whichever comes earlier, the money has to be deposited in a special account known as the Capital Gain Account Scheme (CGAS). Doing this conveys to the authorities that you intend to buy a property to save the capital gains tax. Any withdrawal from CGAS should only be for payments to be made in relation to the purchase of the new property .

There are two types of accounts in the CGAS provision. The first account is like a savings deposit account. Withdrawals may be made from the account from time to time subject to other conditions of the scheme. This account is suitable for people who are planning to construct a house over a period of time. The amount withdrawn should be used for the purpose of purchase or construction of a house. It should be used for the purpose within 60 days of the withdrawal. Any unused amount should be deposited back in the same account.


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