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.
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.
To arrive at the Short Term Capital Gains (STCG) –
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. 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 | 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 | xxx |
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
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.
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.
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:
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.
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. |
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?