Selling your house could be a huge financial decision, but at the same time, it also has tax implications. It’s important to understand capital gains tax so that you can avoid surprises and increase returns.

What is Capital Gains Tax?

In case one sells an asset at a higher price than the original buying price, he or she is obliged to pay taxes to the government, known as capital gains tax. It is normally computed as the selling price minus the cost of acquisition in real estate, less brokerage and other incidental costs of buying and selling.

Short-Term vs. Long-term Capital Gains

The duration of holding the land determines the taxation rate.

Short-Term Capital Gains: Any gain from the sale gets added to your regular earnings and then taxed according to your bracket if you have owned it for less than 24 months.

Long-Term Capital Gains: You are eligible for lower taxes if you have held property for more than 24 months. However, this indexation effect was removed by Union Budget 2024 that proposed a significant amendment in case of long-term capital gains in respect of immovable properties.

In short, what this means is that there is no inflation adjustment and the current tax rate stands at 12.5%.

Exemptions and Deductions

Keep in mind the following to reduce your tax liability:

Section 54 and Section 54F: Reinvestment in another Property: Capital gains have to be reinvested within a specified period into another residential property for eligibility under tax exemption.

Section 54 EC: Investment in notified bonds: You can invest your long-term capital gains in notified bonds, issued by approved agencies and be eligible for capital gain tax exemption.

Exemption Under Principal Residence: A few countries/regions provide various deductions and lower some percentage of tax on the selling of primary houses. You must confirm with your local taxation department for such things.

Computation of the capital gain is difficult. Don’t forget the following points –

Acquisition Cost: Actual Cost of the asset.

Improvement Charges: Expenses incurred on extension or improvement.

Indexation: A technique to consider inflation occurred in buying price. It means comparing the purchasing price on the date of purchase with that on the date of selling (not applicable any more on long-term capital gains from real estate).

Selling Cost: Expenses on sale like brokerage and legal fees

Points to Remember

Consult a Tax Professional: Owing to the nature of the tax laws, you must consult a certified tax professional

Record Every Detail: Keep full records of all the expenditures you incurred with respect to purchasing, renovating, and selling your property

Filing on Time: You should file your tax returns on due time to avoid any penalties.

Update Yourself: Be aware of whether tax laws have changed.

Disclaimer: This blog offers general information and in no way offers any type of expertise in taxation. For specific advice contact a tax advisor.

Knowing the basics about capital gains tax and exclusions that may apply to your situation will help you to understand tax liabilities when selling your house.