Sold house in last 2 years? You may get indexation benefit and lower tax rate
LTCG) tax has been reduced to 12.5% from 20% earlier. But, those who have sold a property in the last three years can get the best of both worlds–removal of indexation as well as the lower 12.5% tax rate–thanks to a loophole in section 54 of the Income Tax Act. Section 54 says a seller can use the capital gains made from the property sale to buy or construct a new house.
This exempts the seller from paying tax on the gains made on the sold property. The condition is that the new purchase should be done within two years, or three years if constructing the house. But, this doesn't mean you can leave the gains in the bank account till you don't find the house to reinvest in.
This is because the tax on capital gains is to be paid for the year in which the property is sold. So, if the gains are in your bank account at the time of filing Income Tax Return (ITR) for the year in which you sold the property, you will have to pay tax. To avoid this, the government gives you the option to deposit the gains in Capital Gains Accounts Scheme (CGAS) till the time you finalise the house to reinvest the capital gains.
The money can be withdrawn from CGAS within the specified timeline to purchase a property. It is in CGAS where property owners who sold the property before 23 July, the date when the removal of indexation on property became effective, can get the benefit of both indexation and 12.5% tax rate. It’s a loophole that was not addressed in the Budget.
Say, a person sold a house in May 2024 and has not used the gains yet. Since the property was sold before 23 July, the seller will get indexation benefit to calculate the capital gains. To avail the lower 12.5% tax rate, they can deposit the capital gains in CGAS and withdraw them
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