How to Save Capital Gains Tax on Sale of Land

Updated on: Mar 25th, 2024

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9 min read

Any profit derived from a capital asset will be classified as Capital Gains for income tax purposes and will be subject to capital gains tax. Land is categorised as a Capital Asset, and as its value appreciates, the owner can realise significant capital gains upon its sale. Nevertheless, it's worth noting that agricultural land in rural areas of India falls outside the definition of a Capital Asset. Consequently, no capital gains tax is applicable upon its sale. Let us understand how profits from sale of land will be taxed and explore the tax savings methods.

Short-term or long-term capital gains

The tax implications will vary based on whether the gains are categorized as short-term or long-term and such categorisation shall be based on the period of holding of assets. Capital  gains from land will be considered as 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 a long-term capital gains. 

How to calculate your capital gains

To arrive at the Short Term Capital Gains (STCG) –

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 you are permitted to deduct the Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. 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).

ParticularsAmount
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 Gainsxxx

What are the Tax Rates

  • STCG is included in your taxable income and taxed at applicable slab rates. See latest income tax slab rates
  • LTCG is taxed at 20% with indexation benefit

How to save tax on the sale of land

Section 54F (applicable in case it is a long term capital asset)

You can claim an exemption against the capital gains if you use the sales amount from land proceeds to buy a house property. You may end up paying no tax on your gains when – You satisfy all these conditions 

  • You must be an Individual or HUF; the exemption does not apply 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 land sale or within 2 years after the sale.
  • Construct one house within 3 years after the date of sale of land
  • 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.

If you meet these conditions and invest the entire sale proceeds towards the new house, you will not be liable for any taxes on your gains. However, if you invest only a portion of the sale proceeds, the exemption will be proportional to the invested amount i.e. cost of new house x capital gains / net consideration.  

By Investing in Capital Gains Account Scheme

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property can be a harrowing and time consuming process. Fortunately, the Income Tax Department understands these limitations. 

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 in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it. 

Section 54EC (applicable in case it is a long term capital asset)Purchasing Capital Gains Bonds

What happens if you do not intend to purchase another property, there is no use of investing the amount in a Capital Gains Account Scheme. In such a case, you can still save the tax on your capital gains, by investing them in certain bonds: 

  • 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 Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50 lakhs in these bonds  in a financial year.

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 land 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.

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 54? What is the maximum limit allowed?

Exemption in respect of capital gains from the transfer of a house property and investment of sale proceeds in the purchase of another house property subjected to the conditions specified. Rs.10 crore is the maximum exemption that can be claimed under Section 54. Click here to know more.

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Quick Summary

Capital gains from land are taxed based on short-term or long-term classification, subject to different tax rates. Exemptions like Section 54F and 54EC help save tax on land sales by reinvesting proceeds in property or specified bonds. Capital Gains Account Scheme allows deferring tax payment. Question 1: How are Short Term Capital Gains calculated? Question 2: What are the tax rates for Long Term Capital Gains? Question 3: How can one save tax on land sale using Section 54EC?

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