Q. My father is a senior citizen and has retired from a government job. He sold his house recently for ₹50 lakhs. What is his tax liability? Can he keep the money in his savings account until he is ready to invest?
Income tax liability on sale of a property depends on its cost, how long it was owned and the total amount of other income accruing to the owner in the year of sale.
The net profit that is generated after selling the house property is termed as capital gain. The sale price reduced by the cost incurred on purchase of the property/renovation of the property if any is considered as capital gain .The expenses incurred on sale of the property like brokerage etc. also can be reduced from the sale price to arrive at capital gains.
If the property was held for a short term (less than 24 months), the cost is deducted from the selling price to arrive at the net profit. This will be added to the total income and taxed as per the tax slab applicable to your father.
If the property was held for a long term (more than 24 months), the indexed cost of the property is deducted from the selling price to calculate the net profit. The tax rate on this profit is 20% plus 3% cess.
The indexed cost of house is calculated using the following formula:
Indexed cost of acquisition = Cost of acquisition multiplied by the cost inflation index (CII) of the year in which the asset is sold, divided by CII for the year in which house was first held by your father or FY 2001-02 (whichever is later).
There are two ways your father can save tax on the long-term capital gains from the sale of his house.
1. If your father is using the entire gains from the sale to buy another house within two years or to construct one within three years, then your father does not have to pay any tax (Section 54 of the Income-tax Act). Alternatively, if he has bought another residential property one year prior to sale of the house then the capital gains can also be set off. However, the amount of capital gains should be invested in a capital gains scheme account before the end of the tax filing date for the financial year in which the sale occurred.
There are two types of CGAS accounts—savings deposit and term deposit. The interest rates for these are the same as those for regular bank savings and term deposit accounts. The proof of the deposit can be attached along with the tax return to claim the exemption.
2. The gains can be invested in capital gains bonds such as those issued by the National Highways Authority of India (NHAI) and the Rural Electrification Corporation (REC) for a lock-in period of 5 years. The maximum amount that can be invested is ₹50 lakhs according to Section 54 (EC) of the Income-tax Act. This however has to be invested within a period of six months from the date of sale of the property. The balance gains over and above 50 lakhs if any will be chargeable to tax.
It is important to consider your father’s risk-taking appetite, his needs and his life goals before picking a tax-saving option. As there are many other conditions that must be factored in, it is best to consult a financial advisor.
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