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How to pay Zero Tax on your house sale

So what’s on the top of your mind when you have your property ready for disposal….a smart reputed broker, the best timing to result in a best price, a reputed buyer, legal matters….hmmmm…there’s something more to it, something really important, that would go a long way to ensure that the best price you secure from the sale, indeed remains the “best”.

Tax planning is that one important aspect, which needs to be kept in mind whilst selling a house property.

Though tax planning is a complicated affair, there are certain basic propositions that could be kept in mind to ensure facilitation of payment of “Zero” tax on any gains generated from sale of property. Few such points have been mentioned herein below for your ready consumption.

Think long, gain more – You are eligible to better tax planning options & tools if your property is treated as a Long Term Capital Asset (LTCA). A property is treated as a LTCA when it is held / owned by you in excess of 36 months. Hence, the next time you plan to sell your property; do remember to ensure the holding period to have completed this period of holding.

Index your cost, cut your tax – The sale of LTCA makes you eligible to use the cost inflation index defined for a particular year to increase your cost of purchase. This is done to rationalize the decreased purchasing power of money, e.g. if you can purchase an asset today for Re. 1, you may need Rs. 1.10 for the same purchase to be made at the end of the year. Such change in the purchasing power of money is offset by indexing the original cost.(Click here to know how Indexation reduces your tax outgo)

Double your indexation – Inflation index is allotted for a financial year and accordingly, pre-poning your purchase or post-poning your sale by a day can fetch you large deduction in your tax bill. (Click here to know how you can get double indexation benefits)

Reinvest, pay “Zero” tax – In case of LTCA property generating capital gains, you can avoid paying tax by reinvesting the capital gains portion in eligible investments. Such reinvestments can be made either in another house property (even out of India) or bonds of NHAI / REC (National Highways Authority of India OR Rural Electrification Corp).

Be prompt, reinvest within timelines – In order to claim the exemption from paying any tax on capital gains resulting from the sale of your property, you would need to ensure that such reinvestments are done within the stipulated timelines. The stipulated timelines for both the options are as follows:

Option 1 – The capital gain component can be re-invested in another house property within a period of one year prior or 2 years after, the date of sale of the original house property. You also have an option of constructing a house property within a period of three years after the date of sale of the erstwhile house property.

Option 2 – The capital gain component can alternatively be re-invested in eligible bonds of NHAI / REC within 6 months of date of sale of erstwhile house property.

You need to note that any of the above investments that you make, should not be disposed until a period of 3 years from the date of purchase, else the earlier exempt CGT will have to be paid in the year of sale.

By remembering the above propositions and also by consulting a good tax counselor, you could be sure to eliminate the tax arising on your property sale.