How To Save Tax On Property Sale And What Taxes Are Applicable?

Do you own real estate and would like to sell it? In order to sell real estate and maximize your capital gains, you need to take all relevant factors into account. Before you ever sign the agreement to sell property, consider the tax implications of the sale, regardless of whether you are selling it as an investment or because you need the money. 

If you're moving, you might want to sell your property for the most money feasible so you don't have to pay taxes more than necessary.

Therefore, continue reading about taxation issues from the perspective of the government if you're wondering how to sell property without giving the income tax department a sizable portion of your profits.

Who Is Responsible for Taxing Property Sales?

Taxes are paid at different rates when selling real estate. On the sale of property, both the federal and state governments impose taxes, which you would pay under separate headings. While the seller must pay some of these taxes, the buyer is responsible for paying part of them.

Which Taxes Are Due When Selling Real Estate?

The following are a few taxes that a seller of real estate can have to pay:

Capital Gains Tax on Property Sales

Since the seller is gaining some capital gains from the transaction, the seller of the property is responsible for paying this tax. You will be liable to pay capital gain tax on the profit you make at the time of the sale. Real estate sales with long-term capital gains are subject to a 20% tax rate plus a 3% cess.

The capital gains tax value will depend on whether you are selling the property during the first three years of possession or after that time. If you have owned the property for more than three years, you will be required to pay a capital gains tax of 20% when you sell it. If, however, you intend to sell the property within three years, your taxes will be calculated in line with the applicable Income Tax Slab.

TDS For Property Sales

Following the finalization of the agreement to sell property, there is a new phase in the process. This system was implemented by the government on June 1st, 2013. In accordance with this procedure, the buyer must first remove 1% TDS from the agreed-upon sale amount before giving the seller the remaining funds. 

It is the buyer's responsibility to pay the income tax department this TDS amount. This money is not paid for by the customer out of his own wallet. This 1% is essentially the tax that you, as a seller, indirectly pay; the agreement to sell property may or may not mention it.

Keep in mind that all taxpayers are required to pay the TDS on the sale of the property, regardless of the state in where your property is located. Please be aware that 1% TDS is due on transactions worth at least Rs. 50 lakh. It does not apply to sales of real estate for less than Rs. 50 lakh.

Indirect Taxes On The Sale Of Real Estate

Certain indirect taxes are paid by the buyer directly, even if they flow through the seller. You receive payment from the buyer for these, which you then deposit with the government. Those levied are:

• Service Tax
• VAT

Service Tax on Selling Property That Is Under Construction: If you are selling property that is under construction, you are required by law to pay service tax. The square footage area and transaction value will determine the service tax rate, which can be either 3.75% or 4.5%. This money, which you, the seller, must deposit with the government, must be paid by the buyer to you. If your property is finished construction, you are exempt from paying this tax. Recall that regardless of the state in which your property is located, all taxpayers are required to pay this.

Value-Added Tax (VAT): The state government imposes this tax. While some jurisdictions do not charge VAT on the sale of real estate that is still under development, others do. As a result, the state in which your property is located will determine how much VAT is charged on the sale of your property.

What Are The Details Required to Deposit TDS While Selling a Property?

The information needed to deposit TDS when selling a property is as follows:

• Buyer's PAN card to vendor
• The buyer's and seller's residential addresses. Seller's residential status
• The property address that will be sold
• Date of agreement
• the due date
• Value of transactions
• Paid amount

You can pay TDS both offline and online. Visit the Income Tax Department's online portal and complete form 26QB to make an online payment. You can fill out the form in person at the closest bank location as well. When an NRI sells real estate, Form 27Q has to be filled out.

Crucial Information Regarding TDS When Selling Real Estate

The following should be considered when making a payment to sell a property:

• For the buyer to receive Form 16B, the seller must provide a PAN Card.
• An annual Form 26AS (Annual Tax Statement) must be checked to make sure the correct amount is paid.
• There could be penalties from the authorities if TDS is not paid on time.

How To Save Tax On Sale Of Property?

You may have discovered that the entire amount of taxes you must pay on the sale of your property is quite large. Your question is about how to save taxes on the sale of the property. You should be aware of any steps you can take to guarantee a lower tax deduction. For this, the government has provided a number of rebates and exemptions, which we will go over below.

Reducing Tax on the Sale of Property via Purchasing a New Home or Plot

For individuals and HUF, there is a tax savings on capital gains or profit under Section 54 of the Income Tax Act of 1961. The most obvious is using the extra money to purchase another property. The money that was acquired should be invested for a maximum of three years following the sale date. However, a person is only permitted to make this kind of investment once in their lifetime.
 

Capital Gains Account Scheme 

If, after receiving your capital profit, you are unable to build a home or make real estate investments, you may lodge the profit money in a Public Sector Bank under CGAS. The abbreviation for Capital Gains Account Scheme is CGAS. Only if you intend to make an immediate investment in another home would this be the case. 

Recall that you have an only three years to organize your affairs and purchase or build a new residence. If not, there will be a 20% tax on the parking sale amount in addition to a 3% long-term capital gain cess. The benefit of exemption is offered for the purchase of up to two residential properties for a total price of no more than INR 2 crores as of the assessment year 2020–21. Note that, purchases of retail or commercial real estate are not eligible for section 54 incentives.

Purchasing Bonds (54EC) via Property Sales

Under Section 54EC of the Income Tax Act of 1961, the government provides an additional chance to avoid paying taxes on property sales—but only in the event that the gain is long-term capital. You can use this tool to invest in specific financial assets after selling your property, shielding your hard-earned capital gains from taxes. In accordance with 54EC, you have six months from the time you receive the money to invest it in notified bonds.

The National Highways Authority of India (NHAI) and the Rural Electrification Corporation (REC) are the issuers of the bonds in question. Each financial year, you are only able to deposit a maximum of INR 50 Lakh in these bonds. Recall that you will be subject to capital gains tax if you transfer your bonds or take out a loan against them before three years from the date of your investment. Stated differently, there is a lock-in period of three years when purchasing these bonds.

Conclusion

You do not want to lose a significant portion of your gains in property after you have chosen to sell it, for whatever reason. So, now know about how to avoid capital gains tax on sale of property.

Therefore, consider measures to lower your tax component while you are determining how to sell your house and who the ideal buyer will be. Before you sign the agreement to sell property, make sure you have given careful thought to all of the aforementioned factors.
 

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