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Taxes When Selling and Buying a Residential Property

Taxes When Selling and Buying a Residential Property

Debopriyo Bhattacharyya purchased a flat in 2017 with the help of a Rs 30 lakh loan. Now, he plans to sell the flat and use the proceeds to buy another one. He wonders about the tax implications of this move. We asked Shruti K.P, Partner at IndusLaw, to explain.

Tax on the Sale

When you sell your residential house property (RHP), you have to calculate your long-term capital gains. This involves subtracting the sale consideration (after deducting transfer expenses) from the indexed cost of acquisition/improvement. The resulting figure is your taxable capital gains.

Taxes Exemption Under Section 54: However, if you plan to buy another RHP, you can reduce your tax liability by claiming an exemption under Section 54 of the Income Tax Act.

  • Section 54 allows individuals to save on long-term capital gains arising from the sale of an RHP. You can do this by purchasing a new RHP in India within one year before the sale, or within two years from the date of sale, or by constructing a new RHP in India within three years from the sale date.

How the Exemption Works: If you buy a new RHP within the specified time limit, you can claim an exemption up to the extent of your capital gains or the investment made in the new flat, whichever is lower. The remaining amount, if any, will be subject to capital gains tax.

In simple terms, if your capital gains are lower than the amount you invest in the new flat, you won’t have to pay tax on the gains. But if your capital gains exceed your investment, you’ll pay tax on the excess amount.

In Conclusion: When you sell a residential property and plan to buy another one, you can take advantage of tax exemptions under Section 54 of the Income Tax Act. By understanding and following the rules, you can reduce your tax liability and make the most of your investment.

Remember that tax laws can be complex, so it’s a good idea to consult a tax expert or legal professional for personalized advice.


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