Selling Your Home? Understand Your Tax Implications!
Tax Implications : You may decide to sell your most valuable asset, your home, at some point in your life. This decision may be made for a variety of reasons, such as moving to a better house, relocating to another city or country, or experiencing a financial crisis. However, there is something that requires your attention: selling off property in India is subject to taxation. Except for agricultural land, the tax is paid on the sale of all property types. When a property seller receives income from the sale of immovable property, he or she must pay two types of taxes. The same rules apply to an NRI property owner as well. Continue reading the blog to learn more about such taxes.
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Taxes That Must Be Paid When Selling a Home
The following taxes must be paid when selling a property:
Tax Implications : Tax Paid at the Source (TDS)
It is, as the name implies, a tax paid when making a payment to the seller (i.e. at the source of the transaction being done). TDS is paid by the seller but deposited on his or her behalf by the buyer.
According to Section 194 IA of the Income Tax Act of 1961, TDS is levied at 1% of the total sale consideration of the property.
Tax on Capital Gains
For the purposes of income tax computations, movable property such as land, building, apartment, individual house, and so on is referred to as a capital asset. As a result, the amount received from the sale of a property is treated as capital gains and is subject to Capital Gains Tax.
This tax does not apply to land used for agricultural purposes.
Tax Implications : Capital Gains Types
Short-term capital gains and long-term capital gains are the two types of capital gains.
Capital Gains in the Short Term (STCG)
The STCG Tax is levied when a property is sold within 24 months of purchase. If the property was inherited, the original owner’s date of purchase will be considered.
The difference between the property’s sale and purchase prices is referred to as the STCG. This STCG amount is added to the seller’s regular income and taxed according to the seller’s income tax bracket.
Tax Implications ; Capital Gains Over Time (LTCG)
The LTCG Tax is levied when a property is sold within 24 months of purchase. Budget 2017 reduced the time period from three to two years.
The LTCG Tax rate is 20%. This is in addition to the regular income tax that the seller must pay on salary or business profit.
The LTCG, like the SCTG, is the difference between the purchase and sale price of a property. The LTCG, on the other hand, is calculated by taking inflation into account during the property’s sale. The benefit of indexation is available to determine a reasonable cost of purchase of the property in terms of its current-day value.
Major Factors Influencing Capital Gains Tax on Property Sales
The following are a few major factors that influence the calculation of capital gains tax on property sales.
The cost of the property influences the amount of capital gain tax levied on the sale of the property. This is because the total taxable amount includes the property’s renovation costs as well. For example, suppose you paid Rs 40 lakh for a property and spent Rs 10 lakh on renovations. The capital gains tax will be levied on gains exceeding Rs.50 lakh.
Holding Period: The period during which you own the property but do not sell it affects your tax liability. If such a transaction falls under the category of short-term capital gains, you may face a higher tax liability. However, if it is considered a long-term capital gain, you may have to pay 20% capital gain tax on the sale of the property.
New Property Investments: According to Indian IT Law, if you reinvest the money you received in exchange for your property within a certain time frame, you may end up paying a low capital gain tax.
Property Ownership: Your tax liability is also affected by the number of properties you own. If you own multiple properties, you may end up paying a higher capital gain tax on the sale of your property. However, the tax amount is low for single-property owners.
Finally, there is a tax on property sales.
If you decide to sell your property at any point in time, keep the tax implications in mind. If you are aware of such an implication, you may lose a significant amount of money. Before signing a sale deed, you should perform the calculations shown above.
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