How to Save Capital Gains Tax on Sale of Land

There are various exemptions available on long term capital gains on sale of land such as section 54F, 54EC and 54B. On satisfaction of conditions prescribed, exemptions can be claimed under the respective sections. However, short term capital gains are not eligible for the aforesaid exemption.

Key Highlights

Some of the tax saving options for land sale are:

• Capital gain exemption under section 54F - investment in a residential property.
• Capital gain exemption under section 54EC - investment in specified bonds (NHAI, RECH, PFCL, IRFCL).
• Capital gain exemption under section 54B - investment in urban agricultural land.

How to Save Tax on the Sale of Land?

• Profits arising from the sale of immovable property, such as a plot of land, building, or both, are taxable in the hands of taxpayers under the head "Capital Gain" of the Income Tax Act. 
• It is classified as short term or long term capital gain, depending on the holding period.
• However, taxpayers can save from long term capital gain tax liability by claiming exemption under sections 54F, 54EC and section 54B of the Income Tax Act. 
• These sections provide capital gain exemption schemes that help taxpayers legally save on tax arising from such transactions.

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

Under Section 54F, the taxpayer can save tax liability on capital gain if the sale proceeds are used to acquire 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.

Exemption Calculation

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;                 

Exemption u/s 54F =    Amount invested in New House Property x LTCG 
                                                        Net Sale Consideration

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.

Section 54B (Applicable for Long-Term Capital Asset) - Urban Agricultural Land

• If the agricultural land is located in a place which is of certain distance from the nearest municipality, it is called urban agricultural land. 
• If it is located farther than the specified distance, it is a rural agricultural land.
• Rural agricultural land is not treated as a capital asset and the entire capital gains on its sale are exempt.
• If it is located within the specified distance, it is categorized as urban agricultural land and section 54B exemption is applicable.
• If an individual sells an urban agricultural land and reinvests it in another urban agricultural land within 2 years of such sale, he can claim exemption under section 54B.
• If you sell the new land within 3 years from its purchase, then the entire capital gains that was exempt earlier is taxable in the yar of such sale.
• The specified distance is tabulated below. If the land is located within the specified distance from the municipality of certain population, it is a, urban agricultural asset. Else, it is categorized as rural agricultural asset.

Other Sections to Claim Exemptions on the Sale of Land

How to Calculate Your Capital Gains?

For Long Term Capital Assets, 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).

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%.

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 (Sep 15 2025 for FY 2024-25 (AY 2025-26)), 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.  

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