Seven things to know after selling your home

It's very important to keep all the paperwork related to the sale transaction in order. This includes:

You need to pay long term capital gains tax on the sale of a residential property if you have held
the property for more than 2 years and if you have made a profit on the sale of the property. The
profit is calculated by arriving at the indexed value of the property. If you have held the property
for less than 2 years, you have to pay short term capital gains tax on sale. The long term capital gains tax is applied at 20% on the gain amount and short term capital gains tax depends on the income tax bracket you fall under.
Know all about capital gains tax in this article.

In case you have made a gain on the property sold, you need to re-invest the gain amount into another residential property within 2 years of sale or within 3 years (for under-construction) properties, if you do not wish to pay the 20% long term capital gains tax. If the price of the property purchased is more than the gain amount, no capital gains tax will be levied. If the price of property purchased is lesser than the gain amount, the amount left after purchase of new property will be taxed.

Till you invest the gain amount into a new house, you should deposit it in a Capital Gains Account scheme, in case the new house is not purchased before the filing of the income tax return. In case the new house is purchased before the filing of the income tax return, it is not necessary to invest the amount in a Capital Gains Account.
You could also invest the gain amount into Capital Gains Bonds/Sec 54EC including REC, NHAI, Power Finance Corporation and Indian Railway Finance Corporation bonds which are risk free and offer approximately 5% returns annually. They however have a lock in period of 5 years and the maximum amount you can invest is Rs. 50 lakh.

A capital gain account can be opened in any authorized bank recommended by the government which includes Central Bank of India, State Bank of India and its subsidiaries, Syndicate Bank, IDBI Bank, Bank of Baroda and Corporation Bank. This account is meant for keeping tax payers’ sales proceeds from sale of assets, till they can be reinvested, without incurring the heavy long term capital gains tax. Proof of the account must be given at the time of filing income tax returns which are to be tax-exempted.

There are 2 types of Capital Gain Account schemes:

In case there is a loss on sale of property i.e. the capital gains are turning out to be negative, such a loss can be set off against other long term capital gains. This loss can however, only be set off against incomes from the same head i.e. it can only be set off against incomes arising under the head “Capital Gains.” This long term capital gains can arise out of sale of another residential property, mutual funds or equity. These assets must have been held for at least 1 year. Carry-forward of losses is also allowed by the tax department to the next year and even further upto 8 years.

The best portfolio mix for you after the sale of your house will depend upon whether you wish to save capital gains tax or not. In case the tax outgo is large, you should invest into another property and save this money. However, if you are not paying a large amount as taxes or are unable to invest in another residential property, you can consider other options depending upon your age profile and your risk appetite.

So decide wisely and invest your money into that asset category which gives you the returns and mental peace that you are looking for.