When planning to buy a new home, you must first consider how you will finance the purchase. People often sell their old house to fund the new one. But did you know that the sale of your old property might have tax implications? If you don’t address these, they could affect your financial situation. Here’s what you need to understand about managing tax obligations during this process.
When selling a property, you are likely to incur capital gains. Capital gains tax is applicable depending on the duration for which you held the property. The computation of these taxes can be complicated, so seeking professional advice from a qualified chartered accountant or tax consultant is advisable. However, here are the basics you should know.
Your capital gains tax depends on the duration for which you held the property:
When selling your property, certain expenses can be deducted from the sale price before calculating the capital gains. These deductions can reduce your taxable gain. Expenses eligible for deduction include:
Once you’ve determined your taxable capital gains, you can explore methods to reduce or exempt some of the tax liability. Section 54 of the Income Tax Act provides provisions to save LTCG by investing in a new property or capital gains bonds.
If you’ve sold a property, you can save on LTCG by purchasing another house within two years or constructing a new one within three years. The capital gains used for purchasing or constructing the new house are exempt from tax.
If you don’t wish to buy a new house, you can invest up to ₹50 lakh in specified bonds within six months of selling your property. These bonds, issued by institutions like REC and NHAI, have a 3-year tenure. If you sell or pledge these bonds within the 3-year period, the tax exemption will be lost.
If you haven’t sold your property but have taken out a housing loan for purchasing or constructing a new house, you can claim tax deductions under various sections of the Income Tax Act.
Under Section 80C, you can claim a deduction of up to ₹1.5 lakh per financial year on the principal repayment of your home loan. This limit is inclusive of other deductions like provident fund contributions and insurance premiums.
You can claim a deduction on the interest paid on your home loan:
In the case of a joint home loan, both co-applicants can claim these deductions individually, provided they are co-owners and contributing to the loan repayment. The tax benefit is proportional to each person’s contribution to the repayment of both principal and interest.
Moving to a new house is an exciting journey, but understanding the taxation implications can ensure you don’t face any surprises. From managing taxes on the sale of your old house to claiming deductions on home loan payments, careful planning can help you maximise your savings. Seek professional help if necessary to ensure that you’re making the most of available tax exemptions and deductions.