How To Save Tax On Gains From Property Sales
MAS Team | 10 June 2022
If you are planning to sell a property in the near future then you should be aware of the rules on capital gains tax on property. If a property is sold within two years (24 months) of buying it, any profit from the transaction is treated as a short-term capital gain. This amount is added to the annual income of the property owner for that financial year and is taxed as per his/her income tax slab.
However, if you sell a property after holding it for more than two years, then the gain from that transaction is considered as long term capital gain (LTCG) and it is taxed at 20% after indexation (factoring in inflation). Another thing that needs to be mentioned here is that if you sell your house within five years of the end of the financial year in which it was purchased, the tax deduction claimed for the principal repayment, stamp duty and registration under Section 80C are reversed and the amount becomes taxable in the year of sale. Only the deduction claimed on home loan interest payment under Section 24B is left untouched.
So if you have bought a house by taking a home loan and have claimed the benefits under Section 80C, it is advisable to hold that property for at least five years. If you have not claimed the benefit of Section 80C then you should hold the property for at least two years. 
It is worth mentioning here is that one can also get exemption from LTCG tax payment on sale of a property. If you use the entire gain from the property sale to buy another house within two years or construct a house within three years then you can get exemption from LTCG tax payment. You can also get exemption from LTCG tax if you have bought a property one year before selling the first one. 
As per the provisions of Section 54, the amount of capital gains is required to be invested in the purchase or construction of “one residential property” for availing the capital gains exemption benefit.
However, where the amount of capital gain does not exceed Rs 2 crore, the taxpayer may, at his option, purchase or construct two residential houses in India.
If you are not interested in buying any other property then you have another option to get exemption from LTCG tax by investing that money in capital gains tax exemption bonds, which are also known as 54EC bonds. These bonds can only be issued by specified government organisations such as REC Ltd (formerly Rural Electrification Corporation), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI) and Indian Railways Finance Corporation Ltd (IRFC). Recently, REC, a navratna enterprise of the government, launched REC Capital Gains Tax Exemption Bonds-Series-XVI. Investment in these bonds allows exemption from LTCG tax payment under Section 54EC of the Income Tax Act. 
However, to save tax on LTCG, only the gain part needs to be invested in Capital Gain Bonds.  For example, if a house property bought for Rs 20 lakh 10 years back is sold for Rs 50 lakh and the indexed cost is Rs 30 lakh, to save the tax on LTCG of Rs 20 lakh, only Rs 20 lakh should be invested in Capital Gain Bonds.
To qualify for the tax exemption, the capital gains have to be invested within six months of the transfer of the asset. The quantum of capital gains invested in these bonds would be exempt from LTCG tax, subject to an upper cap of Rs 50 lakh on the investment amount irrespective of the financial year. 
The face value of each Section 54EC bond is Rs 10,000 and a minimum investment of two bonds valuing Rs 20,000 need to be made. You can invest a maximum of Rs 50 lakh in 54EC bonds in a financial year. However, in case of jointly-held assets like real estate, each owner has a separate limit of up to Rs 50 lakh for investing in these bonds.
In simple words, if you and your spouse sell a house and made a long-term capital gain of, say, Rs 1 crore that was held jointly by the two of you, then each of you can invest Rs 50 lakh in these bonds and claim a capital gains exemption up to that amount.
Lock-in, Interest Rate and Ratings
These bonds come with a lock-in period of five years from the date of allotment and are non-transferable. You cannot even sell these bonds on stock exchanges, because they aren’t listed. Premature redemption is not permitted under any circumstances. However, in case of death of the investor, if there is a joint holder, the bonds can be transferred to the second or third holder. In the absence of joint holders, bonds can be transferred in the name of the nominee.
Since these bonds are meant for a specific purpose (reinvesting capital gains), they are automatically redeemed after their tenure of five years. You don’t even need to surrender your bond certificate. Interest or redemption proceeds are automatically credited in the registered bank account of the investor.
All 54EC bonds carry the highest rating, a AAA rating. Given that these bonds are backed by the government, there are almost no risks of defaults. For instance: REC (formerly Rural Electrification Corporation) has been assigned the highest credit rating for long-term borrowing by domestic credit agencies India Ratings, CRISIL, ICRA and CARE. On an international basis, REC has been given long-term borrowing ratings from Fitch and Moody's that are on a par with sovereign ratings for India. CRISIL has assigned a CRISIL AAA/Stable (pronounced as CRISIL triple A rating with stable outlook) rating to the REC capital gains bonds. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. REC bonds offer an interest rate of 5% per annum, payable annually, on 30th June each year, until the date of redemption. It may be noted that the interest earned on these bonds is taxable but no TDS is deducted on interest. 
The amount of capital gains can be kept in the Capital Gain Accounts in accordance with the Capital Gain Accounts Scheme, 1988 (CGAS), if the re-investment in the house property (under section 54) or in capital bonds (section 54EC) is not made till the date of filing the tax return. Also, if the taxpayer has already invested some of the portion of the proceeds/gains in the specified asset, he would be only required to transfer the balance portion in the CGAS in order to claim tax exemption on the entire amount.
So which option is more beneficial? 
It depends on various factors such as whether the taxpayer wants to invest in new residential property or wants liquidity in the medium term (the term of bonds issued under section 54EC on or after 1 April 2018, is 5 years) and also other aspects such as appreciation in the value of the new residential property or the interest rates on bonds, need to be factored. 
Capital Gains Account scheme would suit those who wish to purchase or construct another housing property with the capital gains realised from the transfer, within the specified period.
Capital Gains Bonds would suit those who do not wish to use the capital gains realised from the transfer for purchasing housing property or other long term capital assets