Debunking the So-Called "Tax Hack": Is Buying Property from a Spouse a Smart Way to Save on Capital Gains?

A "tax loophole" has recently gone viral across social media and some online publications, claiming that an individual can save on capital gains tax from a property sale by using the proceeds to buy another property from their own spouse. However, a financial expert has sharply criticized this "hack," describing it as impractical and financially unwise.

What is the Viral Claim?

The story is told through a hypothetical example where a woman sells her property and, to save tax on the profit (capital gains), she purchases another property registered in her husband's name. By doing this, she supposedly claims an exemption under Section 54 of the Income Tax Act, thereby saving on her capital gains tax. The claim appears attractive at first glance and is being promoted as a smart financial move.

The Expert's Analysis: An Expensive Bargain

The expert completely dismisses this argument, calling it an example of "financial porn," where superficial and sensational advice is served without any in-depth analysis. His argument is based on the fact that the expenses incurred in this process are far greater than the tax saved.

He explained the math in simple terms:

• Capital Gains Tax: This tax is levied only on the profit from the sale of the property, not on the entire sale amount. Currently, the long-term capital gains tax is around 20% (though the effective rate is often lower with the benefit of indexation).

• Registration and Other Costs: When you buy a new property, you have to pay stamp duty, registration fees, and other charges on the total value of the property. This cost can range from 7% to 9% or even more, depending on the state.

Understanding with an Example:

Let's assume you made a capital gain of ₹1 crore from selling a property. You would be liable to pay approximately ₹20 lakh in tax on this gain. Now, to save this tax, if you buy a property worth ₹2 crore from your spouse, you will have to pay a registration cost of about ₹16 lakh (at an approximate rate of 8%) on the ₹2 crore value.

In this case, you spent ₹16 lakh to save ₹20 lakh in tax. While it might seem like a saving of ₹4 lakh, the expert argues this is a very narrow view. He states that in many cases, especially when the property value is very high, the registration cost can even exceed the tax saved.

The Lack of "Higher-Order Thinking"

The expert emphasizes that those promoting such "hacks" fail to use "higher-order thinking," i.e., deep and practical thought. They raise several questions:

1. What happens to the money? What will the husband do with the money paid by his wife? The money remains within the family, but a significant amount has gone to the government treasury in the form of registration fees.

2. What are the practical alternatives? After paying the ₹20 lakh tax, you could do much better things with the remaining ₹80 lakh—such as investing in the stock market or mutual funds, buying a smaller property, or simply enjoying the money.

3. Underestimating the Government: He also believes that it is a mistake to assume the government and tax systems are so naive. Even if such an obvious loophole existed, the government would promptly close it in the next budget.

Conclusion

This so-called "tax loophole" is nothing more than an appealing story that is practically and financially flawed. It is an example of a trend on social media where financial advice is given without any thorough analysis. Readers and investors should be wary of such advice and carefully evaluate the costs and benefits before making any financial decisions. There are genuine and legal ways to build wealth and save tax through property, but they require in-depth knowledge and expert guidance rather than superficial "hacks."