Here is what you need to know.
Emotionally and financially, selling a house is a major event. Still, many people wonder, “If I sell a house, how is it taxed?” Let us simplify this so you may better plan and know what to expect.
First, what type of tax applies here?
In India, selling a house results in capital gain—that is, profit. And that’s what suffers taxes.
There exist two forms of capital gains:
1. Short-Term Capital Gain (STCG) should be considered should you sell the house two years after purchase.
- taxed using your income tax slab
- If you fall in the 30% slab, for instance, the gain is taxed at 30%.
2. Long-Term Capital Gain (LTCG)
Should you sell the house after two years, long-term capital gain (LTCG) comes into play.
- paid at 20% with indexation benefit
- Indexation reduces your tax load by changing the purchase cost with inflation.
So the next time you ask, “If I sell a house how is it taxed?” the response will rely on your length of ownership of the property.
How can one determine capital gain?
Here is a basic equation:
Purchase price plus cost of improvements plus selling expenses equals capital gain.
Use indexed purchase cost for LTCG, modified for inflation.
Can I defer paying taxes on this?
Indeed, you can! The government offers some choices for relief:
Following Section 54:
Should you spend the money for the purchase or construction of another house within a designated period, you can save tax
- The new dwelling has to be in India.
- You have two years (buy) or three years (build) following the sale.
Under Section 54EC:
Invest the capital gain in designated bonds, say NHAI or REC.
- Investments have to be within six months of house sale.
- Max investment limit is fifty lakh.
Documents You Should Not Share
Keep these in mind to ensure you claim benefits and correctly figure your taxes:
- Get purchase deed and payment receipts.
- sales deed
- Home loan documentation (should any exist)
- Repair or renovation bills
- Documentation proving new property purchase (should one be claiming exemption)
Final Thoughts
How then would a house sold be taxed? The quick response is capital gains tax. Should you hold it for more than two years, you experience indexation and may even save taxes by reinvestment. Plan your sale carefully always, and if necessary see a tax advisor.
Maintaining the correct records and understanding your choices will help you to save stress and money.
