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There are many ways to gain income tax exemption. One way is to invest long-term capital gains from sale of property in another house. NO income tax will be charged if you sell a residential property and invest the net capital gains (difference in the selling price and the indexed cost of the property) in the purchase or construction of another residential property. The below conditions must be fulfilled to save the tax on capital gains from sale of property:
- The house, on which the capital gain has arisen, must have been held for more than 3 years. If you are “purchasing” a new house from the capital gains, to save tax, either you can purchase the new house within one year of selling the old house or you can purchase the new house within two years after you have sold the old house.
- If you are “constructing” a new house from the capital gains, then to save tax you can construct it within three years of selling the old house.
- You should not sell your new house within a period of three years from the date of purchase or construction.
- If you sell any asset including equity and invest the full proceeds of sale in purchasing / constructing a house, then income tax on capital gains can be saved. You must hold the new house for at least 3 years. You can claim deduction of interest paid during this pre-construction period. The interest for all the years during the pre-construction period is to be aggregated and claimed as deduction in five equal installments during five successive financial years starting with the year in which the construction/acquisition is completed. The direct tax code has proposed to treat all assets as long term if held for more than a year from the end of the financial year in which it was purchased. Hence holding for 3 years will not be required after DTC implementation.
According to the law, when you invest in a new residential property, capital gains earned from selling the old house is the minimum investment amount that is exempt from tax. If you’ve earned from selling other capital assets namely shares, land and gold then to gain exemption from tax, the entire sales proceed may be invested in the new residential property.
As illustrated by the values used in the above table, when using the long term capital gains from selling residential house property to purchase/construct a new home, just invest the capital gains earned (Rs 20 lakh) and gain tax exemption. In contrast, when using capital gains earned from selling other capital assets, the total sales proceed (Rs 100 lakh) must be spent to gain tax exemption.