How to avoid Capital
Gain tax on Sale/transfer
of Property?
Capital gain is considered as the gain/profit on sale of property which is
arrived at by deducting the Purchase Price from its Sale Price and the tax is to
be paid on that gain which is termed as Capital Gain tax. There are two types
of gains that arise on Sale/transfer of property and those are Short term
Capital Gain (STCG) and Long term Capital Gain (LTCG).
by Samir kotak Chartered Financial advisor
Introduction: Short-term vs Long-term
Capital Assets
Type of Asset Short-term Capital Asset Long-term Capital Asset
Immovable Property Held for not more than 24 months Held for more than 24 months
Listed Shares and Securities Held for not more than 12 months Held for more than 12 months
Unlisted Shares Held for not more than 24 months Held for more than 24 months
Debt oriented Mutual Funds Held for not more than 36 months Held for more than 36 months
Note : As per section 50AA, capital gains arising from transfer of the following assets would always be capital gains arising from transfer
of short-term capital assets irrespective of the period of holding of such assets 3
Units of a specified mutual fund acquired on or after 01.04.2023
Market linked debentures
Unlisted bond and unlisted debenture which is transferred or redeemed or matures on or after 23.07.2024.
Strategy 1: Deducting
Selling Expenses
Deducting Selling Expenses
Deducting the expenses incurred on selling the property reduces the sale
price and hence eventually reducing the gain which in turn reduces the
tax burden.
Example
Mr. Ram sold his property for ¹40 lakhs. However, he incurred selling
expenses such as brokerage, legal charges and advertising expenses
amounting to ¹5 lakhs. As a result of the selling expenses, the sale price
now comes down to ¹35 lakhs.
Strategy 2: Jointly Owned Property
Jointly Owned Property Example
If a property is jointly owned, the capital gain arised on the sale Mr. and Mrs. Ram jointly owns a property which they purchased
of property gets divided into the co-owners on the basis of their five years ago for ¹60 lakhs. They sold the same for ¹90 lakhs
share in the property leading to taking double benefit of basic leading to gain of ¹30 lakhs, which is equally divided between
exemption limit and the overall liability reduces. the two as ¹15 lakhs each. They can claim exemption upto ¹1.25
lakhs each, totalling to ¹2.5 lakhs on their respective gains and
hence reducing the overall tax burden.
Strategy 3: Holding
Period of Property
1 Short-term Capital Gains
Holding period less than 24 months
2 Long-term Capital Gains
Holding period more than 24 months
3 Example
Mr. Ram held the property for less than 24 months leading to
short term capital gains which is than charged at the normal
slab rate and without any exemption, whereas if Mr. Ram held
the property for more than 24 months which than leads to
long term gain to be taxed at 12.5% after basic exemption of
¹1.25 lakhs on the long term gain.
Strategy 4: Benefit of
Indexation
1 Benefit of Indexation
When an asset is held for more than 24 months, it leads to long term
capital asset and on sale/transfer of that asset long term capital gain
arises which than gets the benefit of indexation leading to enhanced
cost and reduced gain, eventually tax burden reduces.
2 Example
Suppose Mr. Ram purchased property in year 2020 and sold the same
in year 2024, then the cost of asset which is to be reduced from sale
price to calculate gain is calculated as the (CII for the year of sale i.e.
2024 / CII for the year of acquisition i.e. 2020) x Cost of asset.
Strategy 5: Reinvesting in
New Residential
Property (Section 54F)
Eligibility
Where property sold/transferred is residential property
Option 1
Purchase new residential property either one year before or two years
after the date of sale/transfer
Option 2
Construct a residential property within three years from the date
of sale/transfer
Important Note
The entire sale proceeds needs to be reinvested to avail full
exemption. If only capital gain is reinvested than the exemption
is granted proportionally and also the seller should not have
more than one residential property, excluding the newly
acquired property.
Strategy 6: Reinvesting in
New Property (Section
54)
Option 1
1 Purchase new property either one year before or two years
after the date of sale/transfer
Option 2
2 Construct a property within three years from the date of
sale/transfer
Important Note
The entire sale proceeds needs to be reinvested to avail full
3
exemption. If only capital gain is reinvested than the exemption
is granted proportionally.
Additional Strategies to Save Capital Gains
Tax
Tax Loss Investing in Capital Reinvesting gains Investing in Bonds
Adjustment Gain Account into shares of (Section 54EC)
Losses from other mutual Scheme (CGAS) Manufacturing Under this section, gain of
funds or shares can be used to For claiming exemption on the Company (Section sale/transfer of property can
offset capital gains on gain arrived, investing in CAGS 54G) be saved by reinvesting in
property, to minimise the tax can be considered, keeping in Under this section, individuals specified bonds issued by
liability. mind the time limit of three can reinvest the gains from National Highways Authority of
years for utilising the same, sale of residential property into India (NHAI) or Rural
otherwise liability to pay tax shares of an eligible Electrification Corporation
arises. manufacturing company. (REC), considering the time
limit of making investment
within sux months from the
date of sale/transfer.
Conclusion
Tax Reduction Strategies
Above mentioned methods can reduce the tax liability arised on an
individual on the sale/transfer of the capital asset.
Consult a Professional
It's advisable to consult with a tax professional or financial advisor to
determine the best strategy for your specific situation.
