Capital Gains Tax on Residential Property in India

Question: Can you please help me understand income tax treatment of capital gains tax on sale of residential property in India?

Lets take an example.

• I own a property in Delhi that has a market value of 5 lakhs INR.
• I purchased it around 10 years back, when it was just 1 lakh INR.
• The registered price of property at that time was 50,000 INR.
• And now after the cost indexing and everything, its actual price has gone to 2 lakhs INR.

Now please let me know how can I treat the additional income earned by me (5-2 = 3 lakhs INR)? I suppose that the differential between the registered value (1 lakh) and current value (2 lakhs INR) which is 1 lakhs INR is taxable as long-term capital gains until I invest it somewhere but what about those 3 lakhs INR that I have earned? Is that income shown somewhere to the tax authorities and if yes, then under what head? And if not, how can I buy more real estate with those 3 lakhs (as I will have to anyways reveal the source of funds to Income Tax Department) Also, how can I utilize those 3 lakhs INR, such that I don't have to pay 60,000 INR (@20%) as tax? A bit lengthy, but that's what I need to know. Can you help please?

Answer: Yes definitely, for example, suppose that your cost of acquisition of the residential house or real estate was Rs. 1.50 lakhs INR (Rs.1 lakh plus registration expenses of Rs. 0.5 lakhs). The indexed cost now is Rs.2 lakhs (as told by you). Since the property is a long-term asset, we are concerned only with the indexed cost for tax purposes. Hence, your cost for the purposes of Capital Gains calculation would be taken as Rs. 2 lakhs if you sell that property today.

Now, if you sell your property for Rs. 5 lakhs, you would accrue a Long Term Capital Gain (LTCG) of Rs. 3 lakhs. The same is taxable at 20% flat rate and the tax amount comes to Rs. 60000/-. TO save this tax, you can either buy a new residential property (provided that you don’t own more than 1 other residential property). Here, you have to invest the full Capital Gains of Rs. 3 lakhs to save your tax fully. If you invest an amount lower than Rs. 3 lakhs, you have to pay tax on the remaining amount. Say if you buy a house for Rs. 2.5 lakhs, you have to pay tax on Rs. 50000, which comes to Rs. 10000. Please note that if you sell this new house before 3 years from the date of purchase, your tax exemption, which you are availing, now would be taxed in that year of sale.

Alternatively, you can invest in Capital Gains bonds issued by the Rural Electrification Corporation or the National Highways Authority of India (NHAI). The lock in period for these bonds shall be 3 years and they carry an interest rate of 5.5% per annum. The said bonds are available at banks like HDFC Bank, ICICI Bank, etc.

You can also go for a combination of the above two options. That means you can invest partly in buying real estate and partly in bonds.

Now if you ask if interest on these bonds taxed? Also what after 3 years, do you need to pay any taxes on whatever we get or your money is safe now? Read this

The interest on these bonds is taxable at normal tax rates. TDS would also be deducted if it crosses the specified limits. The principal amount that you get back after 3 years is fully tax free and safe and you can use it in any manner you want thereafter.

Hope the above satisfies your queries. If you need more information, please let me know.