How to save tax while selling a house

How to save tax
while selling a house
Avoid the hefty tax outgo on your capital gains by making the sale at the right time
and investing the proceeds in suitable avenues
iming is critical in finance,
especially if you want to
make a profit. Of course,
you need to pick a good
time to take advantage of
the appreciation in value, but it’s
equally important to keep an eye on
the calendar to avoid paying a hefty
amount as tax. It was a lesson learnt
well by Mumbai-based Benny Abraham when he sold his house in 2011
within two years of purchasing it.
“The property was fetching me nearly 60% in profits on the initial investment, so when I got an offer to
sell it, I immediately agreed,” says
Abraham, a brand consultant. Unfortunately, the 50-year-old had no
clue about the tax implication of his
hasty decision. Not only did he have
to pay a substantial amount as tax on
the profit, he also had to shell out the
tax exemptions that he was availing
of on the home loan.
This is because under the Income
Tax Act, if you sell a house within
three years of buying it, the tax benefits on the principal repayment and
interest paid on the home loan are reversed. These are then included in
your income when you file your tax
return. Also, if a house is sold within five years of the end of the financial year in which it was purchased,
all the deductions claimed under Section 80C with respect to the property are added to the taxable income in
the year of sale.
Capital gain and indexation
Real estate is regarded as an asset, so
the profit from its sale is assessed under the head ‘capital gains’. According to Manish Thakkar, director of
Mumbai-based Thakkar Consultants,
if a property is sold within three
years of buying it, it is treated as a
short-term capital gain. This is added
to the total income and taxed according to the slab rate. However, if
you sell a property after three years
from the date of purchase, the profit is treated as a long-term capital
gain and is taxed at 20% after indexation. While you can avail of various
tax exemptions in case of long-term
capital gains, no such benefit is provided for short-term ones.
One of the advantages associated
with long-term capital gains is the
inclusion of indexation while determining the profit. Indexation is a
method through which the seller is
able to inflate the value of his assets.
Since inflation reduces the value of
an asset over time, it is essential to
increase the initial cost of the house
to calculate its current value. This is
done by multiplying the original cost
price with a factor that is issued by
the Central Board of Direct Taxes.
This factor tracks the increase in the
general price level, or inflation, and
is known as the cost inflation index
(CII). It is notified by the central government for every financial year. The
Income Tax Act considers 1981-82 as
the base year with a cost inflation index of 100. So, the CII for 1982-83 is
109, and so on.
The indexed purchase price can
be calculated as—purchase price x
(CII for year of sale / CII for year of
The indexation of purchase price
helps to reduce the net capital gain,
thereby slashing the tax burden for
the seller.
Reduce your tax burden
You can claim tax exemption under
Section 54 on the long-term capital
gain on the sale of a house. “To avail
of this exemption, you must use the
entire profit to either buy another
house within two years or construct
one in three years. If you had already
bought a second house within a year
before selling the first one, you could
still avail of the tax exemption,” says
Pankaj Ghadiali, tax expert at PC
Ghadiali & Co Chartered Accountants.
“Such capital gain exemption is
reversed and the amount taxed as
capital gain if the new property is
sold within three years of the date
of purchase/construction. This profit will be considered a short-term
gain and taxed at the normal slab
rates, not the 20% beneficial rate,”
says Sonu Iyer, tax partner, Ernst &
You can also utilise Section 54 (F)
to avail of exemption on the longterm capital gain made from the sale
of any asset other than a house.
Again, the sale proceeds should be
invested only in a residential property, not a commercial property or a
vacant plot of land. However, to avail
of this benefit, you should not own
How to compute
capital gains tax
with indexation
more than one house.
The long-term capital gain tax can
also be saved under Section 54 (EC)
if the capital gain is invested for three
years in bonds of the National Highways Authority of India and Rural
Electrification Corporation Limited
within six months of selling the
house. However, you can invest only
up to `50 lakh in a financial year.
The sale proceeds will be calculated on the basis of the valuation
adopted by the state’s Stamp Duty
and Registration Authority and will
not be the amount mentioned in the
deed of conveyance. This is intended to cover the cases where a portion
of the sale price is received by the
seller as unaccounted for cash.
The effective tax is 20% on
long-term capital gains.
Cost of house
Year of purchase
Sale price
Year of sale
No of years
Purchase CII
Sale CII
Indexed purchase price*
Capital gain**
Tax with indexation***
If you miss the due date
It’s possible that you are not able to
make the required investment to avail
of the exemption on capital gains before the due date for filing your tax
return. In such a situation, the
amount of capital gain or net consideration, as the case may be, has to
be deposited in a separate account in
a nationalised bank under the Capital Gains Account Scheme (CGAS)
before the last date of filing your return for the relevant year. There are
two types of such accounts—type A
is a savings deposit and type B is a
term deposit. The interest rates for
these are the same as those for regular savings and term bank deposits.
The proof of the deposit can be attached along with the tax return in
order to claim exemption.
10 lakh
25 lakh
* Indexed purchase price = purchase price X
(Cost inflation index for the year of sale / cost
inflation index for the year of purchase)
`10, 00,000 X (582/281) = `20,71,174
** Capital gain= Sale price –Indexed purchase
price `25,00,000 - `20,71,174 = `4,28,826
*** Tax with indexation = Capital gain x 20%
`4,28,826 x 20% = `85,765
MONDAY, MAY 7, 2012
Don’t blame the
financial players.
Educate yourself
Instead of wallowing on being victimised, investors
should make informed decisions
notice two disturbing trends in public debates about financial products
and advice—sensationalism and righteousness. What are the issues that
rile everyone? Banks are defrauding customers, insurance companies
are bringing out dubious products, advisers are ripping off customers, mutual funds are inefficient, micro-finance is bad for the poor, and brokers are
encouraging gambling. The recommendations and remedies are righteous
about who should do what and how. Can we have a balanced debate instead?
Let us not assume that products on sale, including financial products,
are expected to meet only basic, defined, necessary and ‘good’ needs. Marketing is about creating and growing demand for products and services beyond the basics. Otherwise, all of us would be holding the simplest press
button mobile phone, and paying a low and affordable price. Those that
produce diamond-crusted handsets would surely be sinners. We can argue
about the wasteful consumption of societies and the harmful effects of advertising, but we have come quite a distance to now return to the basics.
False claims are made about what shampoos do to hair, ready-to-eat cereals to nutrition, and so on. Product choices are a reality and producers, including those offering financial products, will release into markets what
they believe appeals to greed, aspiration, or status.
Consider loans. We should ideally live within our means and spend what
we have and taking a loan is downright harmful. Why then do we have
banks at all selling us loans? The truth is that without the benefit of borrowing, it would be a small, shrunken world of limited assets, jobs, wealth
and opportunities. We may paint loans as the demon, but countless entrepreneurs and households have expanded their horizons with this product.
Millions would not own homes if banks did not agree to lend against the
asset they liked to own. By the same reasoning, we can rubbish credit cards
as harmful spend-inducing loans, at usurious rates; stock trading as mindless speculative activity; and derivatives as useless tools to disaster. The
problem, perhaps, is not in the product, but in its misuse. We need fair and
informed exchange between the buyer and seller without being righteous
and patronising.
Every financial product, in its basic
form, engages two different entities and
their balance sheets. A micro-finance loan
is a useful product for a self-help group of
poor women entrepreneurs trying to get a
regular income. The lender likes to price it
based on his balance sheet, primarily driven by his cost of funds and operations. The
borrower takes the loan on her balance
sheet hoping to generate income that helps
repay the loan in instalments. Regulatory
and governance structures should protect
this premise and ensure that the exchange
happens on fair terms for both parties. The
problems in this market primarily arose
with lenders expanding their balance sheets
at the cost of quality, and borrowers using
multiple lenders to fund expenses rather
than assets. Ill-informed regulatory action
targeted pricing, recovery and more micro
issues and killed this market. The responses
to the problem came from a position of misplaced righteousness.
Responsible financial decision-making
is the strategic choice that both businesses
and households have to make. As consumers, we have learnt to distrust the
fancy sale of pure silk garments at a 90% discount, but easily buy into 24%
assured returns. It is in our interest to understand what financial products
do to our finances, our own balance sheets driven by our income, risks, plans
and problems. If we are able to strategise and implement key life decisions
with financial implications, such as how many children we will have and
when, whether both spouses will work, and where we will live and earn, we
need to make money choices with the same level of strategic seriousness. If
it requires us to learn and educate ourselves, that is how it should be.
At a macro level, to create a more healthy market for financial products,
we need two core ingredients. The first is the presence of long-term players, who are well-capitalised, and set industry benchmarks as they grow.
The regulatory environment should focus on nurturing such growth and
development, and provide a competitive environment that encourages fair
play. Mistaken activism has all but killed the business in at least two cases—micro finance and mutual funds. One cannot legislate for integrity, a
lesson lost in both these cases. The second is the presence of a legal system that ensures prompt and punitive action for fraudsters. It is under the
inefficient criminal justice system that fly-by-night operators dupe investors. Misrepresentation of product features, masking risk in fine print,
misleading ads are criminal activities that need to be dealt with as such.
Financial product mis-selling is one manifestation of this deficient justice
Financial products and their sales happen in the larger context of a
poorly regulated and less developed market. Passing on the blame, expecting
protection, and wallowing in helplessness is not going to help anyone. Investors can begin by making the effort to see financial transactions as a
deal between equals on terms both parties understand and agree upon.
There is no short-cut to informed decision-making.
—The author is Managing Director, Centre for Investment Education
and Learning, and can be reached at [email protected]
How to bring down your auto insurance cost
Despite a hike in the third-party motor insurance premium, you can keep the total premium on your motor policy under control
Opt for a higher deductible
You can also opt for a higher deductible
amount in the policy. This means that
you will pay the initial `5,000-10,000 of
the repair bill and the insurance company will pay the balance. The higher
the deductible, the lower is the premium. However, don’t opt for too high a deductible just to bring down the cost of
insurance. You might end up paying more
than the amount you stand to save.
Let go of smaller claims
Share more information
You are entitled to a no-claim bonus
(NCB) for every claim-free year. If you
don’t make any claim for a few years, the
NCB can reduce your premium cost by
as much as 50%. So, don’t rush to make
a claim for fixing every small dent on
your car. Sometimes, what you spend on
repairs could be less than the amount
you stand to lose as no-claim bonus.
Many insurers offer better rates these
days to customers who are willing to
share personal information, such as age,
gender, marital status, occupation, claim
history and driving track record. For instance, Berkshire Insurance, which distributes Bajaj Allianz’s motor insurance
policies, offers a discount of 5% to those
who provide details about themselves by
answering the questions in the forms.
“The premium for a young male who
smokes will be higher than that for the
same amount of cover for a young, nonsmoking female,” says Arun Balakrishnan, chief executive officer, “The details help in the correct calculation of premiums and
also in getting discounts of
Annual premium rates for
third-party motor covers
Up to 1,000 cc
1,000 cc to 1,500 cc
More than 1,500 cc
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Sign up with auto associations
Becoming a member of the Automobile
Association of India (AAI) or its affiliates gives you a discount on the premium rates from some insurers; the discount could be lower of 5% or `200 on
the own damage premium for private
cars. Similarly, if you install an anti-theft
device approved by the Automotive Research Association of India, you could
claim a discount of 2.5%, subject to a
maximum of `500.
Be careful about add-on covers
Up to 45 cc
75 cc to 150 cc
150 cc to 350 cc
More than 350 cc
sure that your premium is not inflated
for options you may never use.
10-25%,” adds Niraj Jain, CEO,
All figures in `
he insurance regulator has hiked
the third-party motor insurance
premiums in line with its decision last year to review the rates
annually. Some insurers are also planning to revise their ‘own damage’ rates.
Put these two pieces of news together
and it is a fair guess that your overall
premium will go up when you buy or renew your motor insurance. Don’t lose
hope though. There are many ways to
keep the total premium on the comprehensive motor policy under control.
Weigh whether the damage is worth filing a claim for or is it smarter to wait for
another claim-free year.
The add-on features like depreciation
cover, roadside assistance, emergency
expenses, and hospital cash, may have
immense utility value, but some agents
try to push unnecessary covers as well.
Tally the policy features with your needs
before buying the add-ons. This will en-
Stick to the mandated part of cover
As per the prevailing law, you have to
buy a minimum cover of `6,000 to compensate third parties for any property
damage. Sure, you have the option to buy
a higher cover, which may come in handy
if there is a huge payout, but remember
that your premium will also rise. If you
want to keep the premium low, opt only
for the mandatory cover.
Transfer no-claim bonus
while selling a car
If you are planning to upgrade your car,
you can bring down the insurance cost
by transferring the no-claim bonus of
your old car. If you have been a careful
driver and have a 40-50% no-claim
bonus, get it transferred when you sell
your car. The insurer will issue a noclaim certificate, which will get you the
discount on the new car’s insurance. If
the insurance of the new car works out
to `15,000, a 50% no-claim bonus will
reduce it to `7,500. This no-claim
certificate is valid for three years from
the date of issue. Termination of the
insurance means your old car is without
a cover. Since a buyer typically assumes
the car comes with insurance, make
things clear while striking the deal. In
most cases, buying new insurance for
the old car may still be cheaper.
High returns do not come
with higher risk
Getting good returns from your
investments does not mean taking
undue risks. Here’s how to create the
right balance to earn above average
● Scan your health policy
● Rights of a mutual fund investor
● Get your bank to lower the loan rate
● Accessories that improve your tablet
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