One can earn a lot from the profit earned by selling a house. But if somebody sells a house before three years, such a sale will invite short term capital gains tax which will be charged at the rate of 30%. Moreover, he will have to pay a stamp duty of 6 to 8% along with a brokerage of 1 to 2% on purchase of a new house.
So a house should be held for at least 3-5 years after a purchase. Liquidity should also be considered before deciding to change a house. It can be time consuming to sell a house at an expected price. If someone wants to change his house, he should wait for at least three years to make the profit long-term capital gain. This is due to the reason that if the gain is long-term capital gain, he can save tax through investment in another house. In other words one should avoid short term capital gain on a house property. However, one can save tax by investing the profit which is a capital gain in another house provided the gain is a long-term capital gain.
If someone transfers or sells any land or house for an amount which is less compared to the value fixed by stamp valuation authority of the state government, then the value fixed by such authority will be considered as the sale value for computing income tax.
A property that one purchases only for investment purposes, the normal capital gains rules are applicable. To conclude, it can be said that a home should be held for at least 3-5 years after it is purchased.
Consequences of selling a house before five years:
Selling your house before five years will not save tax. If you sell the house before five years, then the deduction claimed under section 80 C for principal repayment in the first few years will not be applicable. This amount will be added to the income of the borrower of the loan and taxed accordingly.
If someone sells a real estate for a profit, he is bound to pay capital gains tax. This tax depends upon the time period for which the property was held. Capital gains tax is something which everybody should consider from the point of view of taxes.
Most of the people are not aware of the situation, but still a tax liability arises. There can be adverse tax consequences in the following years if proper steps are not taken.
How to avoid paying tax for capital gain?
One can, however, convert a rented house into a house for his primary residence, making the sale entitled to the exemption from paying taxes. This is possible when that person owns and lives in the home for about five years before the sale.