Ways to avoid capital gains tax on sale of property

Family members and associates of D’Mart founder Radhakrishna Damani have recently bought as many as 28 housing units worth Rs 1,238 crore in Mumbai. Interestingly, this deal comes at a time when a major provision change mentioned in the Budget 2023 is supposed to go live on April 1. According to this proposal, the government will impose a Rs 10 crore cap on the reinvestment of capital gains from sale of housing property.

The deal shouldn't be affected though, as currently, there are no such limits or provisions.

However, it makes sense to understand what capital gains on property sales means, and how it can be avoided:

Capital gains can be termed as the profit generated from the sale of any investment or property. Depending on the holding period of these assets, capital gains are classified into two categories — long-term and short-term..

If an individual sells land/house/property within 36 months (3 years) of acquiring it, it’s considered to be a short-term capital gain. If it is sold after 36 months (3 years), the same is considered to be a long-term capital gain.

There are explicit exemptions available to an individual taxpayer, who reinvests the capital gains arising from sale of a residential house, or net consideration arising from the sale of any other capital asset — other than a residential house — into the purchase or construction of a residential house. These exemptions were allowed without any limit to promote the housing sector.

The Union Budget 2023 has introduced a ceiling on such reinvestment in residential houses up to Rs 10 crore for the purposes of claiming exemption of capital gains. However, this limit is applicable for sales transaction that will take place from April 1, 2023.

"It effectively means that the taxpayers can carefully look at the timing of sale of their residential house property to take the benefit of exemption without any limit," said Sandeep Sehgal, Partner - Tax, AKM Global, in an exclusive interaction with CNBC-TV18.com.

"Further, the limit of Rs 10 crore shall impact individuals who purchase expensive residential house properties for more than Rs 10 crore and hence, the majority of the house owners shall not be impacted due to this high limit," Sehgal said.

There are other ways too to avoid capital gains.

The individual can invest the sale proceeds from the sale of a property in another property within 2 years before or after the sale to claim exemption under Section 54 of the Income Tax Act.

Alternatively, they can invest the sale proceeds from the sale of a property in a house under construction (to be completed within three years from the date of sale) to avoid capital gains tax, Adhil Shetty, CEO at BankBazaar.com told CNBC-TV18.com.

If someone is planning to defer the property purchase for up to 2 years after selling the existing property, they can also opt for a rollover of capital gains under Section 54F of the Income Tax Act.

Taxpayers can invest the sale proceeds in bonds notified by the government to the extent of Rs 50 lakh to avail the exemption.