Selling a home carries a considerable strain, in terms of finding a suitable buyer ready to pay an attractive price and close the deal at the earliest. After you complete this stage, the tax implications arising out of the sale of the property will become your focus. The profit you make from the sale is known as capital gains. But the process of calculating the gain includes indexation benefit. There are several ways to save the tax outflow and the tax laws spell out the different options available to sellers of property.
Circle Rate Reality
In the current fiscal, there is mixed news for those who sell any immovable property in India. Under Section 50C, the immovable property is regarded as a capital asset. If the value of the apparent consideration stands lower than the value according to the circle rate adopted for the payment of stamp duty, the difference between the value declared in the agreement and the circle rate becomes taxable in the hands of the seller.
The value as per the circle rate is deemed to be the consideration for the sale of the immovable property. Even for a small difference between these two rates, the seller has to pay tax on the higher consideration. In case the taxpayer had to make investments under Section 54, 54F or 54EC to claim exemption, the investments to be made have to be computed with reference to the circle rate. The seller of the property has to invest the money he has never received. Even, the difference between the circle rate value and the agreement value becomes taxable in the hands of the buyer.
Circle Rate Relief
In order to reduce the litigation and hardship to sellers and buyers, any minor difference between the circle rate and the apparent consideration will not attract the provisions of Section 43CA and 50C. It shall not be applicable in case the difference between these two values is not more than five percent.
Similarly, the buyer will not be required to pay tax under Section 56(2), if the difference does not exceed five percent. If the difference between both these values is higher than five percent but does not exceed Rs. 50,000, the buyer will not be required to pay any tax on such difference.
It has inserted a clarification in Section 54EC – applicable for capital gains. There were disputes pertaining to whether one can claim the tax benefits for investments in bonds along with investments in residential property. The government has included land or building or both, as being eligible for exemption in respect of long-term capital gains, by investments in capital gains bonds from the current financial year.
Capital Gains Bonds Period
There is bad news for sellers of immovable property. Till now, you can claim exemption of long-term capital gains up to Rs 50 lakhs, by investing the amount of capital gains in bonds of National Highways Authority of India, Rural Electrification Corporation and other bonds specified under Section 54EC. These bonds have a maturity period of three years.
Now there is a proposal to increase the lock-in period from three to five years. 20 percent tax saved will be spread over five years. Hence these bonds will cease to be attractive to the sellers. With 7 percent annual savings and 5.25 percent interest on bonds, these bonds gave an annual effective return of 12.25 percent. Now the effective yearly return stands reduced to 9.25 percent. Some prefer to call it rationalization since interest rates on other instruments available in banks and post offices also give similar returns.
Despite the changes proposed in the tax laws, the sellers of property have to accept the fact they have got substantial relief in the budget this year.