How to Save Capital Gains Tax on Sale of Land

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.

Budget 2024 Update

Budget 2024 has proposed the following amendments effective from FY 24-25 - 

• For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
• The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months. Thus, land held for a period of more than 24 months is considered long-term. 
• Short term capital gain on sale of land shall continue to attract tax at slab rates.
• The tax on long-term capital gains on all assets is reduced from 20% to 12.5%. While on the other hand, the indexation benefit that previously was available on sale of long-term assets, has now been done away with. 
• However, sale of land and building made from 23rd July 2024 will attract a tax rate of 12.5% only without indexation benefit or a 20% tax rate with the indexation benefit at the option of taxpayer, if such property has been acquired before 23rd July, 2024. For sale of land and building acquired on or after 23rd July, 2024, the tax rate will be 12.5% without indexation.

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 period of holding 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. 

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 sale of land made on or after 23rd July, 2024, the indexation benefit has been removed and the calculation is to be done in a manner similar to STCG. The tax rate has also been reduced to 12.5% on such long term capital gains.

What are the Tax Rates on Sale of Land

• STCG is included in your taxable income and taxed at applicable slab rates. See latest income tax slab rates. 
• LTCG (Where Acquisition is made on or after 23rd July, 2024) - Taxed at 12.5% without indexation benefit
• LTCG (Where Acquisition is made on or before 22nd July, 2024): 
  • For sale made on or before 22nd July, 2024 - Taxed at 20% with indexation benefit
  • For sale made on or after 23rd July, 2024 - Option to pay tax at 12.5% without indexation benefit or 20% with indexation benefit

How to Save Tax on the Sale of Land

Section 54F (Applicable for 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 nned to satisfy all these conditions to claim the exemption:

• 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 of land 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.
• The exemption under this Section has been limited up to Rs. 10 crores.

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.

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. 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 specifies period expires.  

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

What happens 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: 

• 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. Budget 2014 has specified that you are allowed to claim a maximum of Rs.50 lakhs exemption by investing in these bonds in a financial year.

Relevant Sections to Claim Exemptions on the Sale of Land