India has seen tremendous industrial and economic growth over the last two decades. The urban population has increased considerably of late. The Indian real estate is booming, and the trend is expected to continue for at least another decade. Because of the high demand for houses in big cities such as Delhi, Mumbai, Bengaluru, and Hyderabad, individuals have considered real estate as a good investment avenue.
People in big cities are ready to buy more than one house. The demand is such that the individuals avail loans to fund their acquisition of residential properties. What adds to people buying more than one house is that the government offers tax benefits on home loan repayments, including an exemption of tax on the long-term capital gains earned by selling a property.
1.What is LTCG Tax?
When you earn profits by selling a capital asset such as stocks, real estate, and bonds, then you are liable to pay tax on it. The gains made through selling capital assets is called capital gains, and the tax liability on capital gains is called capital gains tax. The capital gains are further classified under short-term and long-term.
2.What is Short-Term Capital Gain in Real Estate?
If a residential/housing property or a piece of land is held for lesser than 24 months, then it is considered short-term capital. Gains made on selling short-term capital assets are referred to as short-term capital gains (STCG).
3.What is Long-Term Capital Gain in Real Estate?
If a residential/housing property or a piece of land is held for more than 24 months, then it is considered long-term capital. Gains made on selling long-term capital assets are referred to as long-term capital gains (LTCG).
4.Taxability of Short-Term Capital Gains
Short-term capital gains are taxed as per your income slab. There are no exemptions available on the STCG, and hence, you cannot avoid it.
5.Taxability of Long-Term Capital Gains
The tax levied on long-term capital gains is fixed at 20% for real estate. The Income Tax Act, 1961 has certain clauses that allow exemptions on LTCG. Section 54 and Section 54F offer tax exemption on LTCG if the following conditions are met:
- A new residential property is purchased within one year in case of under-construction property or within two years (ready to move in) after the sale of the previous housing property.
- The construction of the under-construction housing property must be completed within three years of the sale of the previous housing property.
- If the total cost of the new residential property is more than the capital gains, then the entire capital gains are tax-exempt.
6. Availing Home Loan and Claiming LTCG Tax Exemption
As per the current provisions, individuals and Hindu undivided families (HUFs) are allowed to avail home loan to purchase a new house and still claim an exemption on the entire LTCG resulting from the sale of the previously long-term held real estate capital asset. However, the purchase of a new residential property must be made within one year of the sale of the old property. The LTCG being used to repay the home loan is considered to be fulfilling the criteria set under Section 54 and Section 54F, and thus you are permitted to claim an exemption on the entire LTCG amount.