How to Save Capital Gains Tax on Sale of Property?



The gain earned from selling your property after inflation and indexed acquisition costs will be subject to capital gains tax. However, capital gains tax on property sales can be avoided in several ways. The task of selling a house can be a hugely tedious one by itself, saving tax on capital gains only adds to the stress. Capital Gains are the profits you earn when you sell a property in India.


Capital Gains are not taxed if these profits from sales are reinvested in the given time frame, as the person receiving these benefits can choose whether to invest the funds and save himself from taxation. Capital gains are the amount you earn after subtracting the cost of acquiring (and repairing and improving) an asset from the sale price. Capital gains can be categorized as either short-term or long-term gains. Short-term capital gains occur when you sell your land, house, or property within 3 years of acquiring it. You are considered to have made a long-term capital gain if you sell the property after three years. In terms of taxation, short-term and long-term capital gains are treated differently. These two types of gains can be reinvested at different tax rates and with different tax benefits.

Real estate capital gains are taxed at 20%, plus a cess of 3% if certain conditions are met at the time of sale. Selling a property you inherited or were gifted will still subject you to capital gains tax. We calculate the purchase price here by indexing it to the year of purchase so that it is equal to the purchase price of the previous owner. 


Individuals and Hindu Undivided Families are exempt from taxation on long-term capital gains (under Section 54 of the Income Tax Act, 1961) on the sale of a house property if:


  • A capital gain is used to purchase another house or build one.
  • An old house is disposed of one or two years prior to the purchase of a new one.
  • After the sale of the old house, the new house is constructed within three years.
  • Just one property is bought/built.
  • The new property bought or built is in India.
  • A new house must not be sold for 3 years from the date of possession.
  • The exemption is in proportion if the cost of the new house is lesser than the sale amount. The balance amount can be reinvested in the next three months under the provisions of Section 54EC.

Capital Gains Account Scheme (CGAS)

Public sector banks have a Capital Gains Account Scheme (CGAS) for those who cannot construct a house immediately after earning from capital gains. One can keep capital gains in this account for a period of three years post which the capital gain amount would be termed as long-term capital gain to be taxable at 20% plus a 3% cess.


CGAS accounts are of two types–Savings deposit accounts (also known as Type-A accounts) and term deposit accounts (also known as Type-B accounts). There are cumulative or non-cumulative interest options in Type-B accounts. 


Funds can be transferred between the two by paying fixed charges. However, money can be withdrawn from type-A accounts by submitting a declaration about the money to be used for construction within 60 days of withdrawal. One has to redeposit any unused funds in the account. 


Investing in Bonds

It is also possible to invest in specified financial assets after selling land to save on taxes on capital gains from being subject to taxation under Section 54EC of the Income Tax Act, 1961. Investing in notified bonds within six months after the transfer will enable you to do so. 


Rural Electricity Corporation and the National Highways Authority of India (NHAI) issue the bonds. You will be charged capital gains tax if you transfer or take a loan against these bonds within three years. There is an investment limit of Rs.50,00,000 in these bonds for every fiscal year. 


If farmland is sold within 8 kilometers of (or more than) a municipality, municipal corporation, town committee, cantonment board, or another civic body with (or more than) 10,000 residents, it is not subject to capital gains tax.


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