There are exemptions provided to save on this tax in case of long-term capital gains arising on sale of a residential property 
You can earn capital gains on the transfer of a house. Capital gains tax is levied on the gains arising out of the sale or transfer of a house. Capital gains tax is computed on the indexed cost of the house purchased, which is deducted from the consideration received by you on its sale.
The Cost Inflation Index (CII) is used for the computation of longterm capital gains. The CII is used to compute the indexed cost of the property’s acquisition. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.

Indexation factor is equal to the CII of the year of sale divided by the CII of the year of its purchase. For example, assume you purchased a house for Rs 1 lakh in 2001-02. Assume you sold it for Rs 10 lakhs in 2012-13. On the face of it, you earned Rs 9 lakhs as capital gains.But this is not true. In 2001-02, the CII was 426 and in 2012-13, it was 852. So, the indexed cost of property comes to Rs 1 lakh multiplied by 852, divided by 426, which comes to Rs 2 lakhs. After reducing this amount from the sale consideration of Rs 10 lakhs, you get capital gains of Rs 8 lakhs. You can reduce the capital gains tax by complying with the provisions specified under the Income Tax Act. The benefit is available only to an individual and a Hindu Undivided Family (HUF).

The house that is transferred should be a building (residential property). The income accruing from it should be chargeable to tax under the head ‘Income from House Property’. The house must have been held for a period of more than 36 months before the date of sale or transfer.The house may be self-occupied or rented out. Other properties, although may be owned by an individual, are not eligible for this exemption. The capital gains should arise from the transfer of a long-term capital asset only.

In order to reduce the capital gains tax, you should have either purchased a house within a period of one year before the sale or transfer, or should do so within two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer. Then, instead of the capital gains being charged to income tax as income of the previous year in which the transfer took place, it will be dealt differently.

If the amount of capital gains is greater than the cost of the house purchased or constructed using it, the difference between the amount of capital gains and the cost of the new house will be charged to tax as income of the previous year. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of comput ing capital gains in respect of the new house, the cost will be nil.

If the amount of capital gains is equal to or less than the cost of the new house, the capital gains will not be charged to tax at all. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new house, the cost will be reduced by the amount of capital gains.

The amount of capital gains which was not appropriated towards the purchase of a new house within one year before the date of transfer of the original house, or which is not used for the purchase or construction of a new house before the date of furnishing the returns of income, should be deposited in specified banks in the ‘Capital Gains Account Scheme’. The account can be opened with any nationalised bank.

There are two types of these accounts. ‘Deposit Account A’ is in the nature of a savings deposit account.Withdrawals may be made from the account from time to time subject to other conditions of the scheme. This account is suitable for individuals who are planning to construct a house over a period of time.

‘Deposit Account B’ is in the nature of a term deposit, which is payable after a fixed period of time.The interest earned on the deposit may either be withdrawn periodically or it may be reinvested.
The deposits may be made in one lump sum or in instalments at any time. The amount should be deposited before the due date for filing of income tax returns. The amount can be used for the purpose of purchase or construction of a house. The amount withdrawn should be used within 60 days of the withdrawal.

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