9 Expert Ways to Slash Your Capital Gains Tax When Selling Property

Are you planning to sell your property? It can be an exciting milestone, but it comes with a hefty tax bill—especially if you make a notable profit. If you're wondering how to reduce my capital gains tax and save more money? Good news! There are several ways you can minimise the tax impact when you sell your property.

What is capital gains tax on property?

Capital gains tax is the tax you pay on the profit made from selling an asset, like a property. When you sell the property for more than you bought it for, the difference is your capital gain, and that gain is subject to tax.

The tax rate depends on how long you’ve owned the property:

• Short-Term Capital Gains (STCG): If you sell your property within two years, the profit is taxed at 20%.
• Long-Term Capital Gains (LTCG): If you sell after holding the property for more than two years, the tax is 20% with indexation (adjusting for inflation) or 12.5% without indexation.

So, how can you save on taxes when selling your property? Here are some simple strategies you can use:

Reinvest in a New Residential Property (Section 54)

If you sell a residential property and reinvest the capital gains into another residential property, you can claim an exemption under Section 54. The new property must be purchased within one year before or two years after the sale, or constructed within three years. This exemption is available only once in a lifetime and is subject to certain conditions.

Invest in Specified Bonds (Section 54EC)

Under Section 54EC, you can invest the capital gains in specified bonds issued by the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months of the sale. The maximum exemption is limited to Rs 50 lakhs. These bonds have a lock-in period of five years.

Reinvest in Shares of Manufacturing Companies (Section 54GB)

If you have long-term capital gains from the sale of a residential property, you can invest the proceeds in shares of eligible manufacturing companies. This exemption is available under Section 54GB, provided certain conditions are met.

Offset Losses from Other Investments

Capital losses from other investments, such as shares or mutual funds, can be set off against capital gains from property sales. This strategy, known as tax loss harvesting, helps reduce the overall taxable capital gains.

Utilize the Capital Gain Account Scheme (CGAS)

If you're unable to reinvest the capital gains immediately, you can deposit the unutilized amount in the Capital Gain Account Scheme (CGAS). This allows you to claim the exemption while providing time to identify suitable investment opportunities. The deposited amount must be utilized within three years; otherwise, it will be taxed.

Joint Ownership

Co-owning a property allows each owner to utilize their individual tax exemptions, potentially reducing the overall tax liability. For instance, if two individuals co-own a property and sell it, each can claim exemptions up to Rs 1.25 lakhs, totalling Rs 2.5 lakhs.

Offset Short-Term Capital Gains with Long-Term Capital Losses

If you have short-term capital gains from the sale of property, you can offset them with long-term capital losses from other assets, reducing the taxable amount.

Invest in Rural Development Bonds (Section 54EC)

Similar to NHAI and REC bonds, you can invest in rural development bonds to claim an exemption under Section 54EC. The maximum exemption is limited to Rs 50 lakhs.

Hold the property for more than two years

Properties held for more than two years qualify for long-term capital gains tax rates, which are typically lower than short-term rates. Additionally, you can avail of indexation benefits, adjusting the purchase cost for inflation, thereby reducing the taxable capital gains.

It's important to consult with a tax professional to understand the specific conditions and ensure compliance with all requirements to maximise your tax benefits. Start planning ahead and make the most of these tax-saving strategies.