Many real estate sellers unknowingly pay more capital gains tax than required by overlooking key deductions that are legally permissible under the Income Tax Act. A recent example shared by Sujit Bangar, founder of Taxbuddy, illustrates how one such oversight could have cost a property seller Rs 1.87 lakh in extra taxes.
In this case, the seller had sold a property for Rs 1.2 crore and calculated capital gains merely by subtracting the original purchase price of Rs 80 lakh. This method ignored several additional costs that can legally be included in the cost of acquisition—such as stamp duty, registration fees, home improvements, and even certain portions of unclaimed home loan interest.
Under Section 55 of the Income Tax Act, such expenses are permissible additions that help reduce the final taxable gain. For example, the seller had incurred Rs 4.7 lakh in stamp duty and registration charges, invested Rs 6 lakh in upgrades like a modular kitchen, and had Rs 3 lakh in unclaimed interest on a home loan. Including these expenses would have significantly reduced the capital gains and, consequently, the tax liability.
This example emphasizes the importance of keeping thorough documentation. Payment receipts, bank statements, and invoices must be retained, as these serve as proof of the claimed deductions. Bangar warns that using fake or backdated bills can backfire, especially since the Income Tax Department now relies on digital tracking and verification tools.
His core advice to property sellers is: plan early, gather all genuine documents, and consult a tax advisor if needed. A lack of awareness, particularly among middle-class sellers, often leads to overpayment, making professional guidance crucial for major financial transactions like selling property.
