What Happens To Capital Gains On Your Second Home?

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Let us assume that Mr Mohan had purchased a second house for INR 40 Lakhs for investment purposes and then sold this house two years later for INR 50 Lakhs. The profit of INR 10 Lakhs is known as Capital gain .

 

What Are the Tax Implications of the Capital Gains?

 

If the house or property is sold before a period of 3 Years it is known as short term capital gain. This amount is added to Mr Mohan's regular income and is taxable as per the tax slab he falls under. In this case an amount of INR 10 Lakhs is added to Mr Mohan's taxable income. If a property or a second home is sold after a period of 3 years the profits earned are known as Long Term Capital Gains. These amounts are taxed at the rate of 20% after indexation. Indexation basically factors in inflation and the acquisition cost of the house is recalculated. This brings down the amount of taxation.

 

This amount is then added to the taxable salary based under which slab the individual falls under. As per Section 54 if one were to invest the capital gains in a residential property within two years of sale or constructs a new house within three Years from the date of sale then the capital gains are exempted from long term capital gains tax. However one should not own more than one house apart from the house he is investing in.

 

The investment has to be made in residential property only. The profit arising from capital gains can be invested in capital gain bonds which have a lock in period of 3 Years up to a maximum limit of INR 50 Lakhs.

 

These bonds may be REC or NHAI Bonds. The capital gains invested in these bonds are fully exempted from tax.

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