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  • Category: Tax Planning

    How to save tax on the sale of residential plot?


    Provide some tips to save the tax on property sale. Is there some smart money investment scheme for buying homes and providing for other family needs?

    I want to know what are various plans and tips to save the tax on property sale. How to receive payment to avoid any tax liability.If I invest the one part in home buying and other for children education, How the tax planning will be ? Expert please advise. Non professional may excuse.
  • #139128
    You can save tax only if the full amount is invested in purchasing or constructing a new property.

    The tax on sale of property comes from the Capital Gains. It is capital gains tax. Capital gains is the gain or difference of amount or the extra income over the cost we paid for buying that comes to us on selling the property.

    If the property is held for long time( more than 3 years) before disposing then it is Long term capital gain. It is taxed under capital gains tax. For less than three years, it is short term capital gain. ,STCG. STCG amount has to be treated as that years income and taxed accordingly.

    But it is not a straight calculation of Selling price minus buying price. There is a benefit of inflation indexation. That is related to inflation factor. Suppose the property is bought in 1990 for Rupees one lakh. The sales is in 2016. Then using the standard index available, it is calculated what is the equivalent value of One lakh of 1990 in 2016. This is the capital for calculating the gain. The amount of selling price over this indexed capital is the Capital gain. The tax is to be paid on that.

    However there are exemptions available. One is when the whole proceeds is invested on another residential property immediately.
    However if that is not immediately possible then the LTCG amount can be kept in Capital Gains account with designated banks also till further investment in property. That has to be used for investment on new property within specified time.
    Investing the LTCG amount in certain specified Capital Gains Bonds within six months of the sale, gives you tax relief.

    However one should not resort to any illegal tricks to avoid tax, as that can lead to trouble at a later date. It is better to take help of an established professional tax consultant when the amount involved is high, or one does not have the knowledge and expertise in these matters.

  • #140028
    As you have mentioned that you want to avoid tax liability on the sale of land then it will not be possible if you wish to invest a part of it purchase a new plot/house and remaining in education of children.

    As to what kind of tax liability will arise has already been explained to you by ISC member so I will not go into that but only let you know what implications might there be.

    1. Suppose you receive Rs. 50 lakhs as total sale proceed for the plot sold now after deduction of indexed cost of land your total capital gain comes to 10 lakhs. Now tax @20% will be levied on Rs. 10 lakh and that comes to Rs. 2 lakh.
    Now if you want to save Rs. 2 lakh then you will have to invest the entire sale proceed i.e. Rs.50 lakh in new residential house/plot to save the tax arrived.
    If you invest Rs. 30 lakh in new residential house and remaining for education of children then you will have to pay Rs. 80,000 as tax and you will save only Rs 1.2 lakhs.
    This derived as follows: Amount invested/ Entire sale proceeds x Total Capital Gain tax

    This can be increased or decreased by increasing/decreasing the investment amount out of total sale proceeds.

    2. To save more tax by using the money for children education you cannot do so by paying to some schools or teaching them yourself and funding their books, uniforms etc from the money you have set apart from sale of plot.
    Although you can pay the Capital Gain tax and then use the remaining money for children education by donating to some charitable trust which provides education to childrens. You can claim atleast 50% of donation for tax benefit from your tax liability under section 80G. Although the deduction may not be very huge and also the tax saving may be little but still your purpsoe of education for children may be fulfilled.

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