Alternative Investment

Tax saving on sale of property: Know the alternative investment options

In case you sell your house property after two years or 24 months from the date of purchase, you may reduce or eliminate the tax on long-term capital gain (LTCG) not only by buying or constructing new house(s), but also by investing the capital gain amount in the way mentioned in the Income Tax Act. Otherwise, you will have to pay 20 per cent tax on the gain amount subject to indexation benefit.

You can reduce or even eliminate the tax burden on LTCG by investing in Capital Gain Bonds u/s 54EC, and in start-ups u/s 54GB of the Income Tax Act.

Archit Gupta, Founder & CEO, Clear explains the details of the tax-saving investment options:

Section 54EC: Capital Gain Bonds

Another option is to reinvest the LTCG on the sale of land or building in specified tax-saving bonds under Section 54EC and reduce your tax outgo. The bonds specified under Section 54EC include National Highways Authority of India (NHAI) bonds and Rural Electrification Corporation Limited (RECL) bonds. However, such investments have a lock-in period of five years.

Section 54GB: Investment in Start-Up

Tax on LTCG on the sale of a residential property is also exempted under Section 54GB if such gains are invested in small or medium enterprises or if the same is an eligible start-up. Thus, if you sell a residential property and invest the capital gains to subscribe to 50 per cent or more equity shares of the eligible start-ups, then tax on LTCG will be exempt provided that such shares are not sold or transferred within five years from the date of its acquisition. However, the company should utilise the amount for purchasing the new asset within one year from the subscription date.

“Also, the law allows you to adjust the capital losses with the capital gains and reduce your tax liability. As per the income tax provisions, you can set off short-term capital losses against STCG or LTCG. In case of a long-term capital loss, you can set it off only against LTCG,” said Gupta.

However, a maximum of Rs 50 lakh can be invested in a Capital Gain Bond. So, if your LTCG is more than Rs 50 lakh, you may not save the entire tax by investing in one of such bonds and may have to choose more than one investment options.

Recently, the National Highways Authority of India has discontinued issuance of the 54EC bonds, reducing the scope of investments for saving the LTCG tax on sale of properties.

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