How to save Capital Gains Tax on Sale of Land

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Land is a Capital Asset and and as an appreciated asset, a landowner can make huge capital gains on its sale. However, agricultural land in a rural area in India is not considered a Capital Asset. So, no capital gains are applicable on its sale. Before we find out how your capital gains shall be taxed, do make sure Income Tax considers your asset to be a capital asset.

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Union Budget 2021 Outcome:

The consideration so received or accrued as a result of the transfer of the residential unit shall be adopted to calculate the capital gain, if the stamp duty value is up to 120% (earlier 110%) of the consideration. The transfer of “residential unit” means an independent housing unit is the first time allotted to any person between 12th November 2020 and 30th June 2021 for a consideration not exceeding Rs. 2 crores.

Short-term or long-term capital asset

Land is a short term capital asset, when held for 36 months or less (i.e. up to 3 years). If held for more than 36 months, it is considered a long-term capital asset. So tax implications too vary based on the duration for which you own an asset.

How to calculate your capital gains

To arrive at the Short Term Capital Gains – From the total Sale Price of the asset deduct cost of acquisition, expenses directly to sale, cost of improvements(if any) also deduct exemptions allowed under section 54(as applicable, we’ll see below what these are) – > the resulting amount is the Short Term Capital Gain.

In case of Long Term Capital Assets, the only difference is, one is allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation is done by applying CII (cost inflation index). This increases your cost base (and lowers your gains) since the purchase price is adjusted for the impact of inflation.

What are the Tax Rates

  • STCG are included in your taxable income and taxed at applicable tax rates basis your slab. See latest slab rates
  • LTCG are taxed at 20%

Exemptions from your Gains that Save Tax Section 54F (applicable in case its a long term capital asset)

If you are using your entire sale proceeds to buy a house property you may end up paying no tax on your gains when – You satisfy all these conditions 

  • Purchase one house within 1 year before the date of transfer or 2 years after that
  • Construct one house within 3 years after the date of transfer
  • You do not sell this house within 3 years of purchase or construction
  • This new house purchased or constructed must be situated in India
  • You should not own more than 1 residential house (other than the new one) on the date of transfer
  • You do not purchase within a period of 2 years after such date or construct within a period of 3 years after such date any residential house (other than the new one).

When you satisfy these conditions and invest entire sale proceeds towards the new house – you won’t pay any tax on your gains. However, if you invest a portion of the sale proceeds, the exemption will be the proportion of the invested amount to the sale price or exemption 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) of the financial year in which you have sold your property, you are allowed to deposit your gains in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. And in your return claim this as an exemption from your capital gains, you don’t have to pay tax on it.

However, you must invest this money you have deposited within the period specified by the bank, if you fail to do so, your deposit shall be treated as capital gains. 

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. Bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) have been specified for this purpose. These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property.

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 50lakhs in a financial year in these bonds.

Proposed amendment under Section 54EC
Budget 2018 has inter alia proposed an amendment to Section 54EC of the Income-tax Act. This section currently provides for an exemption of long term capital gains(“LTCG”) on sale of any Long Term Capital Asset provided the capital gains are invested within 6 months from the date of transfer, in certain long term specified assets viz any bond, redeemable after three years and issued on or after the 1st day of April, 2007 by the National Highways Authority of India constituted under section 3 of the National Highways Authority of India Act, 1988 or by the Rural Electrification Corporation Limited.

Vide the budget, the government has proposed to amend the above section by restricting its scope only to capital gains arising from long-term capital assets, being land or building or both. It is also proposed to provide that long-term specified asset, for making any investment under the section on or after the 1 April 2018, shall mean any bond, redeemable after five years as against the earlier three years and issued on or after 1 April 2018 by the National Highways Authority of India or by the Rural Electrification Corporation Limited or any other bond notified by the Central Government in this behalf.

This amendment will take effect from 1 April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Tax exemptions in case of short-term capital gain

For short-term capital gain, the person can benefit from the basic exemption limit of the income tax slabs. 

Hence, the following persons can take the benefit of the basic exemption limit.

  • Indian residents (below 60 years): Income tax will be exempt on short-term capital gain on sale of the property if the profit (or total taxable income) stays within Rs.2,50,000.
  • Senior citizens (age 60 – 80 years): Income tax will be exempt on short-term capital gain on the sale of the property if the profit (or total taxable income) stays within Rs.3,00,000.
  • Super senior citizens (older than 80 years): Income tax will be exempt from short-term capital gain on sale of the property if the profit (or total taxable income) stays within Rs.5,00,000.
  • Hindu Undivided Family (HUF): Income tax will be exempt on short-term capital gain on sale of the property if the profit (or total taxable income) stays within Rs.5,00,000.
  • Non-residential Indians: Income tax will be exempt on short-term capital gain on sale of the property if the profit (or total taxable income) stays within Rs.5,00,000.

Hence, the only benefit of exemption in short-term capital gain is through an unutilised basic exemption limit, as explained above.

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