Saving Taxes!
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.
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.
To arrive at the Short Term Capital Gains (STCG) can use the following formula -
Particulars | Amount |
Total Selling Price | xx |
Less: | |
Cost of Acquisition | (xx) |
Expenses directly related to the sale | (xx) |
Exemption: Section 54B, 54D, 54G, 54GA | (xx) |
Short-term Capital Gains | xxx |
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).
Particulars (For sale made till 22nd July, 2024) | Amount |
Total Selling Price | xx |
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%.
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 | 20% | Yes |
LTCG | Before 23rd July 2024 | On/after 23rd July 2024 | 12.5% (without indexation) or 20% (with indexation) | Optional |
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:
The quantum of exemption under Section 54F can be determined on the following basis:
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.
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:
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 | 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. |
Tax on Long-term Capital Gains on Equity Funds