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How to Save Long Term Capital Gains Tax (LTCG)

Posted in Finance, Income Tax, India, Investment.

Buying and Selling of Property, Plots, Flats, Land, Independent Houses, Floors or any other form of residential property is a frequent activity in present scenario. Especially with so much activity in the real estate sector, it has been considered to have given good returns. The attractive home loan schemes have made it even more lucrative. However, the transactions are often subject to complicated income tax structure. Here is one case that may solve some of your queries.

When you are about to sell a piece of land for a profit, it is quite likely that Capital Gains Tax would be imposed in the form of Long Term Capital Gain (LTCG). This remains a concern for a lot of people that how can they possibly avoid Capital Gains Tax arising out of the Long Term Capital Gain. In the present article we are discussing an example case.

In the present case the example assessee, an individual, is in the process of transferring a long term capital asset not amounting to a residential house and the proceeds are to be utilised to buy a capital asset amounting to residential house.

The treatment of capital gain on the transfer of capital asset not amounting to residential property is under consideration. Section 54F of the Income tax Act 1961 deals with the current situation.

Where the assessee is an individual, and capital gain arises from the transfer of any long term capital asset (not being a residential house) which in the present case is a piece of land (not amounting to agricultural land) and the assessee has within a period of one year before or after the date on which the transfer of the original asset has taken place, has purchased a  residential house (new asset) or has constructed a residential house within three years; the capital gain shall be dealt as per the following conditions:

  1. If the cost of the new asset is more than the net consideration received in respect of the original asset, the whole of such capital gain shall not be charged to capital gain tax as per section 45 of the Income Tax Act.
  2. If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears the cost of the new capital asset shall not be charged to capital gain tax as per section 45 of the Income Tax Act.

However, the capital gains exemption enumerated in (a) & (b) above is subject to the some conditions. The benefits as discussed shall not be available if:

  1. If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.
  2. If the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset
  3. If the assessee constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.

If you have further queries on the subject of tax related queries, the experts in the panel would be happy to help you with sound tax advice.

1,620 Responses

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  1. Pradeep B says

    Do one need to pay capital gain tax (LT or ST) on sale of agriculture land in Maharashtra state

    • Pankaj Batra says

      Yes, you need to pay tax on sale of agricultural land if it comes under municipal limits.

      • Pradeep B says

        Thanks for the revert Pankaj. What happens in case of agricultural land falls in Grampanchayat jurisdiction with very less village population.

        • Pankaj Batra says

          In case it falls in a municipality area or within 8 kms from the local limits of any municipality or cantonment board, it would be treated as capital asset, otherwise not.
          If it’s a capital asset, then on sale, long term capital gains would apply and would be taxable.

  2. raghavendra says

    I had a plot purchased in 2005 and sold in 2015. LTCG is around 4 Lakhs.
    Proceeds have been spent due to other loans ,crdeit cards and medical operation.

    Can I but another plot in2 years time to avoid tax?

    • Pankaj Batra says

      There is no tax benefit available if you buy/invest into plot.

      • raghavendra says

        Suppose I buy a House,cai I save tax.?
        Since I have spent all the amount and not inveted in any bonds,my requirement is whether I can buy another house in 1-2 years to save tax.

  3. Sandeep Karemore says

    Sir I have Purchased plot in 2010 for Rs. 500000/- and make a sale deed as par govt rate worth Rs. 150000/- . Now In 2015 I would like sell my plot for Rs. 1000000/- and the buyer want to make a sale deed worth Rs. 1000000/- but govt rate of the plot is near about Rs. 300000/- …. If the buyer pay the Rs.1000000/- to my account through DD, Is this amount is taxable to me…. If yes please suggest me for tax exemption.

    • Pankaj Batra says

      Long term gains would be computed on actual sale price or govt rate, whichever is higher.
      You can save tax on gains, by investing into another residential house property or buying capital gain bonds.

  4. sunil says

    sir. mujhe 22acre agriculture land sell krni he. kisse contact kare better rate ke liye plz reply my email

  5. ayush says

    Hello sir, if I am selling my flat to fund my higher education will I still have to pay ltcg tax or will I get a rebate/deduction against my college fee??

    • Pankaj Batra says

      There won’t be any tax benefit available against college fees.

  6. Siva says

    I sold a property that I purchased over 15 years back, in Oct 2015. I plan to buy another property before 31st July 2016. Questions I have are –
    1. Can I place the amount I received from the sale in a Fixed deposit till then? (I won’t be in a position to hunt and reinvest till Apr/May timeframe at least)
    2. Is the interested earned by such a deposit taxed as regular income or is tax exempt if reinvested into a new property before 31st July 2016?

    • Pankaj Batra says

      1. Yes, you can place amount in Fixed deposit.
      2. Interest on fixed deposit would be taxes per your tax slabs. There won’t be any tax exemption on it against reinvestment.

  7. Akand Singh says

    Dear Sir,

    My father sold a flat in Oct 2015 for 41 lacs. The process by which he bought it was quite complicated. He had originally booked 4 flats in a certain building and paid most of the money (65%) for it in July 1997 and made agreement then for these 4 flats. However due to legal problems with that land, the builder couldn’t start construction and by mutual consent, consolidated all funds given into one flat in another building, the possession of which he gave only in Jan 2006. The cost including stamp duty was 6.04 lacs by possession date.

    My father did improvements like changing flooring, etc in Oct 2012 for 70,000, but he has no bills for the same.

    Please let me know:

    1. What is the date to be taken as initial date for LTCG CII computation? Is it agreement date when major amount was paid or possession date which is almost 10 years later?

    2. Can improvement of 70000 be reckoned even though he did not collect and keep any bills?

    3. As per our investment broker the LTCG amounts to about 28 lacs and CG tax would be 5.6 lacs. To avail exemption, should he invest 28 lacs (ie amt of LTCG) or 5.6 lacs (ie amt of tax on LTCG) in REC/NHAI CG bonds?

    Thanx in advance

    And also tanking you for this site and your diligence in answering questions of lay people like us. It is a great help to us.

    • Pankaj Batra says

      1. Possession date should be used for LTCG computation. Earlier advances were not this property, so legally it can’t be proved.
      2. You can use this If asked by IT department, proofs has to be provided for changes.
      3. Whole gains amount needs to be invested in order to save full tax.

  8. Akand Singh says

    Dear Sir,

    To compute net consideration of CG, can one deduct brokerage of 2% of sale value towards expenditure incurred wholly and exclusively in connection with such sale, even though I do not have receipt from broker for the same?

    The broker is unwilling to give a receipt and was paid in cash.

    • Pankaj Batra says

      If there is no proof of payment, you should not be showing same.

  9. Mahesh says

    I have sold a plot on 22/8 /2014 and my long term capital gain is 3,80, save my ltcg can I purchase a plot of 4,00,000.

    • Pankaj Batra says

      As plot was sold, in order to save tax fully you need to invest whole sale consideration into residential house property.

  10. R Jay says

    Dear Pankaj ji,

    My neighbour is selling his flat for 1.90 cr. THE long term cap gain is about 1.7 cr. Can he reduce his cap gain tax by:
    1. investing in capital gain bonds
    2. by buying an acre or two of land in his village and constructing house thereon.

    Further in section 54f, it reads as follows “The long term capital gain arising from the transfer of anycapital asset, not being a residential house, will be exempt …..”. Does this mean his flat will not be eligible for exemption? What does residential house mean? Does it include flats or is just stand-alone houses? Why is this tax language so difficult and confusing?

    Thanking you

    • Pankaj Batra says

      @R Jay
      He can save tax by investing into capital gain bonds u/s 54EC (upto Rs 1 crore, 50 lakhs each in 2 different financial years, but investment has to be done within six months of sale) and buying/constructing residential flat u/s 54.
      Buying land and constructing house on it would also come u/s 54.

      • R Jay says

        Thank you very much fo your reply.
        1. isnt the deduction of 50 laks cg bonds limitd to 50 laks only for all financial years.
        2. Is it okay if he buys five acres of land for 1.75 cr and builds just a small house for about 15-20 laks? i.e does the proprtion between land and house matter?

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