How to Save Capital Gains Tax on Sale of Land

By CA Mohammed S Chokhawala

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Updated on: Jul 1st, 2025

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4 min read

A plot of land, building, or both are categorised as Capital Assets in the Income Tax Act. Profit on the sale of such assets is classified as capital gain and taxable under the “Capital Gain” section of the Income Tax Act.

Land, buildings, or both held for more than 2 years shall be taxable at 12.5% without indexation as Long-term Capital Gain. Otherwise, it is treated as a short-term capital gain and taxed at the applicable slab rate of the taxpayers. However, to ensure that the taxpayer benefits from such profits, exemptions under sections 54F and 54EC have been provided by the Income Tax Act, which can be utilised to minimise the taxable capital gain income and save tax.

Let us understand how profits from the sale of land, buildings, or both will be taxed and explore tax savings methods.

Capital Gains Exemption on Sale of Land

Short-Term or Long-Term Capital Gains

The tax implications will vary depending on whether the gains are categorised as short-term or long-term, and such categorisation shall be based on the holding period of assets. Capital gains from the sale of a plot of land, building, or both will be considered short-term if the land was owned for up to 24 months (or 2 years) before selling, and if it were held for more than 24 months, it would be considered long-term capital gains.

Short-term capital gains will be taxed at the applicable slab rate of taxpayers. Long-term capital gains will be taxed at 12.5% without indexation. The taxpayer can also compute long-term capital gain tax at 20% with an indexation benefit. However, this option is available for resident individuals and HUFs if land, buildings, or both are sold before 23 July 2024. Between these two rates for long-term capital gains, the taxpayer can choose whichever is beneficial. 

How to Calculate Your Capital Gains

To arrive at the Short Term Capital Gains (STCG) can use the following formula -

ParticularsAmount
Total Selling Pricexx
Less: 
Cost of Acquisition(xx)
Expenses directly related to the sale(xx)
Exemption: Section 54B, 54D, 54G, 54GA(xx)
Short-term Capital Gainsxxx

For Long Term Capital Assets, the only distinction is that resident individuals and HUFs are permitted to deduct the Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price for sale made on or before 22nd July, 2024. Indexation involves adjusting the purchase price for the impact of inflation by applying the Cost Inflation Index (CII). This adjustment increases your cost base (and reduces your gains).

Particulars (For sale made till 22nd July, 2024)Amount
Total Selling Pricexx
Less: 
Indexed Cost of Acquisition(xx)
Expenses directly related to the sale(xx)
Exemption: Section 54B, 54D, 54EC, 54F, 54G, 54GA(xx)
Long-term Capital Gains (Taxable @ 20%)xxx

For the sale of land made on or after 23rd July 2024, the indexation benefit has been removed and the calculation is to be done similar to STCG. The tax rate has also been reduced to 12.5% on such long-term capital gains. However, the taxpayer can still choose to compute tax by availing indexation but with a higher tax rate of 20%.

What are the Tax Rates on the Sale of a Plot of land, Building or Both?

The following table explains the tax rate and applicability of indexation in various cases for sale of land:

Type

Acquisition Date

Sale Date

Tax Rate

Indexation

STCG

Any

Any

As per slab

No

LTCG

On/after 23rd July 2024

After 23rd July 2024

12.50%

No

LTCG

Before 23rd July 2024

Before 23rd July 2024

12.5% (without indexation)

or

20% (with indexation)

Optional

How to Save Tax on the Sale of Land

Section 54F (Applicable for Long-Term Capital Asset)

Under Section 54F, the taxpayer can claim an exemption on capital gains if the sale proceeds are used to purchase or construct a residential house property. The following conditions have to be fulfilled:  

  • You must be an Individual or HUF; the exemption is not available to companies, LLPs, or firms.
  • The new house you buy or construct must be located in India
  • Purchase the house within 1 year before the date of sale or within 2 years from the date of sale.
  • Construct one house within 3 years from the date of sale.
  • Do not sell the house within 3 years of purchase or construction.
  • On the transfer date, you should not own more than 1 residential house, excluding the new one.
  • The exemption under this Section has been limited up to Rs. 10 crores.

Quantum Of Exemption

The quantum of exemption under Section 54F can be determined on the following basis:

  • If the cost of new residential house property > Net Sale Consideration, then the entire capital gain is exempt.
  • If the cost of new residential house property < Net Sale Consideration, the amount of capital gains exempt will be calculated by the formula;                    Amount invested in New House Property x LTCG 
                   Net Sale Consideration
     

Investing in Capital Gains Account Scheme (CGAS)

Alternatively, if you have not been able to invest your capital gains until the date of filing of income tax return (usually 31st July), you are allowed to deposit your gains in the Capital Gains Account Scheme(CGAS) and claim this as an exemption from your capital gains in your taxreturn .

However, if the amount deposited is not utilized for the specified purpose within the stipulated period, then the unutilized amount shall be charged as capital gains in the year in which the specified period expires.  

Section 54EC (Applicable for Long-Term Capital Asset) - Purchasing Capital Gains Bonds

What if you do not intend to purchase another property? In such a case, you can still save the tax on your capital gains, by investing them in certain bonds like:

  • Rural Electrification Corporation Limited or REC bonds,
  • National Highway Authority of India or NHAI bonds,
  • Power Finance Corporation Limited or PFC bonds,
  • Indian Railway Finance Corporation Limited or IRFC bonds.

These bonds are redeemable after 5 years. If such bonds are transferred to another person or converted back to money, then exempted capital gain shall become taxable in the year of such event.

You are allowed a period of 6 months to invest in these bonds – though to be able to claim this exemption, you will have to invest before the return filing date. The maximum exemption that can be claimed by investing in these bonds in a financial year is Rs. 50 Lakhs.

Relevant Sections to Claim Exemptions on the Sale of Land

Section

Exemption

Section 54F

This exemption can be claimed when the proceeds from the sale of capital asset (other than residential house property) are utilised to purchase a new house property

Section 54EC

This can be claimed when the proceeds are utilised to purchase certain notified bonds

Section 54B

This is claimed when the proceeds from the sale of urban agricultural land are invested towards the purchase of another agricultural land.

Section 54D

Capital gains which arise from the compulsory acquisition of land or building forming part of an industrial undertaking and the proceeds are invested in the acquisition of a property for setting up another industrial undertaking.

Section 54G

Exemption in respect of capital gains from transfer of assets in cases of shifting of industrial undertaking from urban areas to rural areas

Section 54GA

Exemption with respect to capital gains from transfer of assets in cases of shifting industrial undertaking from urban areas to special economic zones.

Related Articles

Capital Gains Tax

Long-term capital gains

Short-term capital gain

Tax on Long-term Capital Gains on Equity Funds

Short Term Capital Gain on Shares

Capital Gains Exemption

Section 54F

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Frequently Asked Questions

What are the cases in which the exemption in respect of tax on capital gains is revoked?

The exemption would be revoked if the new property purchased is sold within 3 years from the date of purchase of such property.

What is an exemption under section 54F? What is the maximum limit allowed?

Exemption regarding capital gains from transferring long-term capital assets, such as the plot of land, land, building, or both, but other than residential house property, rural & urban agriculture land.
Investment of sale proceeds in the purchase or construction of house property in India is subject to the conditions that capital gain not more than Rs.10 cr. is eligible for exemption under section 54F.

How to save Capital gains tax on sale of land?

You can save capital gains tax on sale of land by claiming exemptions available under Sections 54F and 54EC.

Is Tax rate on sale of land held for long term reduced?

Yes, for sales made after 23rd July 2024, the tax rate has been reduced to 12.5%. However, the indexation benefit, which was available for long-term capital assets, has also been removed. However, taxpayers still have the option to pay tax at the rate of 20% after taking the indexation benefit if the sale of land is made on or before 22nd July 2024, and this option is available only for resident individuals and HUFs.

Will Indexation benefit be available on sale of inherited land where the sale has been made during the FY 24-25?

 The taxpayer can also compute long-term capital gain tax at 20% with an indexation benefit. However, this option is available for resident individuals and HUFs if land, buildings, or both are sold before 23 July 2024.

About the Author
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CA Mohammed S Chokhawala

Content Writer
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I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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