Reinvesting Capital Gains From The Sale Of Real Estate
Here, we’ll go over capital gains, reinvestment, and the process. Are you trying to find solutions to reduce your capital gains taxes? One method is to reinvest the capital profits from the sale of a property. As an alternative, you can use the proceeds to build a house within three years or invest in the capital gains bonds offered by the Rural Electrification Corporation and the National Highway Authority of India (NHAI). We will go over capital gains, reinvestment, & the process in this section.
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What exactly are capital gains?
Capital gains are the proceeds from the sale of any asset, including stocks, real estate, and other assets. Capital gains are subject to taxation, just like other assets. The kind of asset used to achieve capital gains and the length of time invested determine the interest rate.
Property capital gains tax
A person must pay capital gains tax when they sell real estate they own and make money. This is determined by the money he receives from the sale of the property.
Capital gains are calculated as follows: selling price of property – original purchase price.
The capital gains tax is computed by using the formula mentioned above to the capital gains.
Types of property capital gains
Short-term capital gains tax: This is levied on assets that are sold for a profit within three years of the original acquisition date.
Long-term capital gains tax: This is levied whenever a property is sold for a profit more than three years after it was first purchased. A capital gains tax of 20% is imposed in the event of long-term capital gains taxation following indexation.
What exactly is reinvestment?
Reinvesting money obtained from the sale of one property into another within a specified term is one of the most sought-after techniques to save capital gains tax.
Keep in mind that you can only reinvest in residential properties—you cannot do so in commercial ones.
How to reinvest to avoid capital gains taxes?
Reinvestment under Section-54 by a person or a Hindu Undivided Family (HUF)
- Under Section-54 of the Income Tax (I-T) Act, an individual or HUF can reinvest in a single residential property and avoid paying capital gains taxes.
- The taxpayer must purchase a new residential property within a year of the previous house’s transfer date. Or build a new residential property within three years of the old house’s transfer date, either one year prior to or two years after that date.
- When there is a forced purchase, the time frame for construction or acquisition starts on the day that the initial or additional money is received.
- The Finance Act of 2020 Revised Section-54 to extend the benefit of exemption with respect to investment made in two residential buildings, effective with the Assessment Year 2021–2022. If the long-term capital gains are less than Rs 2 Cr, the investment made in two residential properties—either through building or purchase—is exempt from taxes. In the event that the assessee uses this option, he will not be allowed to do so for that assessment year or any other. Furthermore, the Finance Act of 2023 has limited the maximum exemption permitted under Section-54, effective from Assessment Year 2024–2025. If the new asset costs more than Rs 10 Cr, the extra amount will not be taken into account for calculating the exemption under Section-54.
The Capital Gain Account Scheme will be used to deposit the proceeds of sales
Note that the taxpayer must deposit the earnings from the sale of property under the Capital Gain Account Scheme (CGAS) in a separate bank account if he intends to build a house within three years or purchase a residential property within two years. The funds are not available for use at any other time. And can only be taken out for reinvestment during the purchase or building phases.
Non-utilization of the total amount deposited in CGAS
The unutilized amount (for which an exemption is claimed) will be taxed as income through long-term capital gains of the year. In which the specified period of two or three years expires if funds deposited in the CGAS that the taxpayer has claimed exemption under Section-54 on are not used within the specified period for the purchase or construction of the residential house.
Reinvestment by any assessee
Bond investments allow all taxpayers to benefit from capital gains tax benefits from the sale of residential property, as stated in Section-54EC of the I-T Act. The investment must be completed either before the deadline for submitting tax returns for the applicable fiscal year, or within six months following the land’s transfer date.
A taxpayer is allowed to invest up to Rs 50 lakh. Each stakeholder in a joint venture is able to contribute Rs. 50 lakhs. Take note that the minimum holding period for these bonds is three years for taxpayers. The tax benefit will be removed if they redeem the bond or take out a loan against it within the first three years.
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