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How to save capital gains tax on property sale?

You have sold your property and have earned a profit on it as well. Let us suppose that after buying it, you held for one year and then sold it. In that case, the profit earned from its sale will be considered as short-term capital gains. Such gains are added to your taxable income and are taxed according to the income slab applicable to you. There are no exemptions available to save such tax.

However, if you had held your property, let us suppose for five years, the profit earned from its sale would be considered as long-term capital gains. You will have to pay 20 percent tax on it, which is known as Long-Term Capital Gains Tax (LTCG Tax). Owing to the high-ticket nature of real estate deals, the tax outgo can be a hefty amount, and you would want to save as much of it as possible.

There are multiple exemptions which you can take advantage of to lower or eliminate your payable LTCG tax. They are explained as follows:

Purchase or construct a residential property

Under Section 54 of the Income Tax Act, 1961, an individual selling a residential property can make use of tax exemption on long-term capital gains if such gains are used to purchase or construct a residential property. Remember, this exemption is only applicable to long-term capital assets (in our case, immovable properties with a holding period of more than two years).

The following conditions need to be followed to obtain this exemption:

  • The seller must purchase a residential property either one year prior to the sale of the original property or two years after the sale of the original property
  • If you are constructing a house using the capital gains, then the construction of the same should be concluded within three years from the date of sale of the original property
  • The new residential property has to be located in India
  • The exemption will be taken back if the newly purchased or constructed property is sold within three years of its purchase/construction

According to the Finance Act, 2019, with effect from Financial Year 2019-20 (FY 2019-20) - corresponding to Assessment Year 2020-21 – the capital gain exemption under Section 54 has been made available for the purchase of up to two residential properties in India. The exemption for this is subject to the long-term capital gain not being more than Rs 2 crore. In addition, this exemption is available only once in the lifetime of a seller.

If the investment made in the new property exceeds the capital gains earned from the sale of the original property, the exemption shall be limited to the capital gain amount. If the investment made in the new property is lesser than the capital gains earned, then, the remaining capital gains shall be taxable at a flat rate of 20 percent.

Deposit the funds in a capital gains account

Identifying a suitable property to re-invest your capital gains into, arranging all of the required funds and getting the documentation in place can take some time. Accordingly, if you have not been able to re-invest your capital gains into a new property until the date of filing your income tax returns, then you may invest these gains in a ‘capital gains account’ in any of the branches of authorised banks (excluding rural branches of such banks) such as Bank of Baroda, as according to the Capital Gains Account Scheme, 1988. This deposit can be availed as an exemption from capital gains.

In case the deposited amount is not utilised within the specified period of two years (in case of purchase of new residential property) or three years (in case of construction of a new residential property), then, the deposit will be treated as short-term capital gains in the year within which the specified period lapses.


Invest the funds into capital gain bonds

If you do not want to re-invest your capital gains earned from the sale of your property into a new residential property and do not want to construct another one, you can invest your profits in ‘Capital Gain Bonds’ under Section 54EC of the Income Tax Act. These are also known as ‘54EC bonds’ and are one of the most popular ways to save LTCG Tax.

A few conditions:

  • The minimum investment into 54EC bonds is one bond amounting to Rs 10,000, and the maximum investment is 500 such bonds totalling Rs 50 lakh
  • Eligible bonds under Section 54EC are issued only by Power Finance Corporation Limited (PFC), National Highways Authority of India (NHAI), Rural Electrification Corporation Limited (REC), and Indian Railways Finance Corporation Limited (IRFC)
  • These bonds come with a lock-in period of five years (effective since April 2018) and are not transferable to another person
  • 54EC bonds offer a five percent annual interest rate. However, this interest is taxable
  • The investment into these bonds must be made within six months of selling the property. In addition, the investment has to be made before the tax filing deadline.

Since these bonds are backed by the Government of India, the associated risk factor is minimal. Also, they allow you to save tax whilst earning interest income.

As you can see, the Income Tax Department has provided excellent options for you to save long-term capital gains tax. It would be prudent to spend some time thinking about your personal finance goals before making such a decision. You can also speak to financial experts about such investments.

Disclaimer: The views expressed above are for informational purposes only based on industry reports and related news stories. 99acres does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.



  • Bharat

    Is it possible to offset capital gains from Debt mutual funds by buying a property?

    May 21, 2022 | 10:58 AM Reply

    1. Tushar Mangl

      Hi Bharat, yes it is possible and you can consult a tax attorney for further details about capital gains offset.

      May 25, 2022 | 4:21 PM Reply

  • A K Das

    I have paid 2 installments to the builder to purchase a new flat on 16Aug 2021 and 01Feb22.
    I sold my old flat on 28th Mar 2022.
    Can I offset the capital gain arising out of the sale both for the installments paid earlier as well as the installment to be paid with in 2 years from 28th March 22?

    May 7, 2022 | 10:19 AM Reply

    1. Tushar Mangl
      @A K Das

      Hi Ajit, yes you can offset the capital gains. Kindly consult a tax professional to check your accurate tax liabilities.

      May 12, 2022 | 3:15 PM Reply


    Super suggestions on reinvestment and details of IT act

    February 17, 2022 | 8:31 AM Reply

  • Anuradha P

    Your article is excellent. Extremely clear and comprehensive. Very useful . Thankyou so much.

    August 29, 2021 | 9:56 PM Reply

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