What are capital gains? It refers to the profit that one makes via the sale of a capital asset, like real estate, or even stocks or bonds. It is considered to be the difference in price between the selling value of a land and its purchase rate. Depending on the duration for which the home was held, the capital gain can either be observed as a long-term capital gain or a short-term capital gain.
When it comes to capital gains tax on home sale, you may be able to sell the house for a high value, but in specific cases, the income tax department may want a piece of the pie. That’s because the real estate capital gains are deemed to be taxable. But it’s possible to reduce or even avert a tax bite on the sale of your home.
What is a Capital Gains Tax?
A capital gains tax is regarded as the payment you make on the profits made from selling an asset. It can be applicable to securities such as stocks and bonds as well as tangible assets – real estate, cars, or boats. To simplify, the ‘gain’ or the ‘profit’ is placed under the category ‘income’, and therefore, it is mandatory that you pay tax for the amount in the year in which the transfer of the capital asset occurs.
Capital gains tax can either be long-term or short-term. They are not valid on inherited property, as in this case, there is no sale and the ownership is passed on. The Income Tax Act has explicitly waived off assets obtained as gifts by way of an inheritance or a will.
Nevertheless, if the individual who inherited the property decides to sell it, in this case, capital gains tax will be applied. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.
Tax on Short-Term Capital Gains
When properties are purchased and sold within a limited duration, the beneficiary earning profit via the sale is predisposed to pay short-term capital gains tax. For tax reasons, the government decides the time that could succeed as ‘short, to repair this charge. For Union Budget 2022-2023, short-term capital gains are taxable at 15%.
Tax on Long-Term Capital Gains
Any property that is held for over 2 years is treated as long-term and the profit on such a sale is usually taxed at 20%, in addition to cess and surcharge. Nevertheless, a taxpayer can ask for an exemption from long-term capital in specific conditions. The government of India places a 10% long-term capital gains tax on profits earned on equity investments of Rs. 1 lakh and above, if these are held for over 12 months.
When it comes to capitalizing on capital gains in buying a new house, until you fill your income tax return form, the gains are not used to buy or build another home. After that, one is required to pay the unutilized amount in a Capital Gains Deposit Account in any public sector bank. The new home can be bought or built, by extracting the amount from the amount, within the quantified time limit.
Capital gains tax is associated with real estate as well, particularly when it comes to selling or purchasing a home. IndexTap has extensive data on residential properties data that will help you with home buying or renting.
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