Any profit derived from a transfer of capital asset will be classified as Capital Gains for income tax purposes and will be subject to capital gains tax. For Example, land is categorised as a Capital Asset, and as its value appreciates with time, the owner can realise significant capital gains upon its sale. However, to make sure that the taxpayer benefits from such profits, various exemptions 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 will be taxed and explore the tax savings methods.

Short-Term or Long-Term Capital Gains

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

Short-term capital gains will be taxed at 20%. Whereas, long-term capital gains will be taxed at 12.5% without indexation. The taxpayer also has an option for opting to compute long-term capital gain tax at 20% with indexation benefit. Between the 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 -

For Long Term Capital Assets, the only distinction is that you 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).

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 Sale of Land

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

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