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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.


1,492 Responses

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  1. Satish says

    Hi Pankaj,
    I had purchased house in 2008 in Pune PCMC area. My agreement value was 19.5L and I invested 6L for interior in 2008.
    I sold the house in 2012 to 70L. As part of disbursement of the agreement value, purchaser paid me booking amount 10L. I used this amount to clear my housing loan. Remaining amount was paid by purchaser through bank loan, I have below questions

    1. Can the LTCG amount I used to repay my housing loan be considered for tax exemption?

    2. I have another housing loan where I am co owner with wife for other residential property. We have received possession of this property couple of months back. Can I use the LTCG amount to repay the loan with tax exemptions?

    3. Can I invest remaining LTCG in below options with tax exemption
    a. agriculture plot which will be converted into NA land for industrial purpose
    b. Buying a Car
    c. Book a flat

    4. Out of 70L, amount which is not considered in LTCG, do I have any restriction to invest ? Can I invest it in 3a or 3b of above question?

    Thanks,
    Satish Gore

    • Pankaj Batra says

      @Satish
      1. There is no exemption on paying home loan from LTCG amount.
      2. Again, there is no benefit on home loan payment. But as per section 54, you can claim tax benefit for new house purchase, if possession of new property is taken within one year before sale of house. If your share in new property is more than gains earned from old house sale then no income tax is payable on LTCG.
      3. You can only get tax benefit if you invest LTCG amount into a residential house property u/s 54 or into capital gain bonds u/s 54EC.
      4. After investing long term gains amount (41.5 lakhs) into residential house property, you can free to spend remaining amount of sale consideration anywhere.

      Please find LTCG computation below:
      Purchase Year = 2008-09, Purchase Cost = 1950000, Cost Inflation Index (CII) for purchase year = 582
      Sale Year = 2012-13, Selling price = 7000000, CII for sale year = 852
      Indexed Purchase price = 1950000 x (852/582) = 2854639
      Long term capital gain = 7000000 – 2854639 = 4145361

  2. Rahul says

    Hi Pankaj,

    Thanks to share your views I am regular viewer your Blog.
    I have one concern please help me for this.
    we have 4(partner name A,B,C,D) partner started firm in 2010 name “ABC enterprise “and invested 11.50 laks each. We have purchased the plot with the same name in 2011 .After that 3 Partner(B,C,D) are retired partner(New “E” partner) add This new partner is invested the money in same firm for development the property.
    Now we have five decided to sell the plot. Our plot purchase is prize is 43 laks (including all)
    And selling plot prize is 75 laks. So please let me know may I give 11.50 laks each from this amount and remaining profit will distribute between “A “ and “E”.
    Please let me know the tax amount also .how to pay tax?

    Thanks,
    Rahul

    • Pankaj Batra says

      @Rahul
      We have little knowledge on taxation of partnership firms. Please ask this questions on another forum.

  3. SWATI says

    HI,

    ONE OF MY CLIENT SALE HIS NON AGRICULTURE LAND ON OCT2012 FOR RS 1223160/- UNDER RAIL PARIYOJANA AND TDS DEDUCTED ON THAT IS RS. 122316.

    HE CONVERTED THIS LAND FROM AGRICULTURE TO NON AGRICULTURE IN JAN 2004. AT THE TIME OF CONVERSION STAMP DUTY IS RS. 3250 AND NIYAMAN CHARGES IS RS. 63840/- LEASE AMT @2.5% RS 15960.

    HE DOESN’T HAVE COST OF PURCHASE BECAUSE THE LAND WAS BELONG TO HIS GREAT GRAND FATHER.

    IS DLC RATE REQUIRED FOR 2004 OR IS DLC AVAILABLE ON NET?

    PLS SOMEBODY HELP ME TO CALCULATE CAPITAL GAIN.

    • Pankaj Batra says

      @Swati
      In case property was purchased before 1981, fair market value as on 1st April 1981 needs to be considered as purchase value.

      Purchase Year = A, Purchase Cost = P, Cost Inflation Index (CII) for purchase year = X
      Sale Year = B, Selling price = Q, CII for sale year = Y
      Indexed Purchase price = P x (Y/X) = R
      Long term capital gain = Q – R = S
      Income tax on capital gain = S x 20%

      Purchase year would be 1981-82, CII for 1981=100
      Sale year=2012-13, CII = 852
      Selling price = 1223160
      Conversion and niyaman charges can be added with indexation to purchase cost. CII for 2003-04 was 463.

      • SWATI says

        thanks pankaj, that means we need to find out 1981 purchase price! how can i get the land value of 1981 pls suggest?

        • Pankaj Batra says

          @Swati
          There are people in market who are govt approved valuators. They can tell fair market price in April 1981.

  4. Vikas says

    Hi Pankaj,

    I have invested amount in Capital Tax Gain and now wanted to construct the house on the plot and use this money. Please advice if I can withdraw money by cash and draft favoring myself name as I need to pay labor and local contractors.

    • Pankaj Batra says

      @Vikas
      You can withdraw amount in draft form, by submitting Form ‘D’ in duplicate with the details regarding manner and extent of utilization of amount of immediately preceding withdrawal.

  5. krishnamurthy says

    My relative had a plot allotted to him by TN Housing Board(TNHB) in 1971 and he constructed a residence on it. He expired in 1985. Subsequently the TNHB gave a Sale deed of the plot in 1996 to his wife’s name after submition of death certificate of her husband and Legal Heirship certificate. Presently the property in her (Wife) name. The corporation property tax, water tax and electicity service are in her name.and is being regularly paid.
    She has grown up 3 sons and 3 daughters. Now she is 80 years old. She wants to sell the property and give the proceeds to all the children, retaining a share for her.
    Can she avoid/minimise the capital gains on the sale of the property by dividing the proceeds to all the 6 children,who can reinvest in property individually for their needs.
    Or can she make a settlement of the property on all the 6 children name and herself, and make the sale of the property, so that the sale share proceeds go directly to their name (children make either pay the capital gains proportionate to their dues or invest in construction/purchase of property

    • Pankaj Batra says

      @Krishnamurthy
      She should first transfer property share among children and her before selling it.
      This would make sure that all tax liability would be of individual owners. They can either decide to pay tax or avail tax benefit by investing into another residential house property or capital gain bonds.

  6. Atanu says

    I am contemplating to sell our residential house cum land for an amount of Rs.1.10 crore. The property is being inherited from our parents who bought it in 1977. We are two brothers, and both had booked flats of 35 lakh and 22 lakh respectively. How to save tax and pl forward the calculation.

    • Pankaj Batra says

      @Atanu
      Long term capital gain computation is shown below:
      Purchase Year = A, Purchase Cost = P, Cost Inflation Index (CII) for purchase year = X
      Sale Year = B, Selling price = Q, CII for sale year = Y
      Indexed Purchase price = P x (Y/X) = R
      Long term capital gain = Q – R = S
      Income tax on capital gain = S x 20%

      CII was started in 1981-82, so purchase year would be 1981-82 and purchase price would be fair market value as in april 1981.
      Sale price would be 1.10 crore. CII for 2013-14 has not been declared yet, but should be minimum 920.

      This long term gains would be divided among all shareholder in same ratio in which they own property.
      To save tax on long term gains fully, each holder can buy/construct another residential house property for amount more than their share of gains u/s 54.

  7. ashok devnani says

    i got immovable property on will of my mother in 2007, i sold it (on agrement) in 2012 November, property was purchased by my father in 1966-67, the property was transferred in the name of my mother on death of my father, how capital gain will be calculated,
    thanks
    ashok devnani

    • Pankaj Batra says

      @Ashok
      Long term capital gain computation is shown below:
      Purchase Year = A, Purchase Cost = P, Cost Inflation Index (CII) for purchase year = X
      Sale Year = B, Selling price = Q, CII for sale year = Y
      Indexed Purchase price = P x (Y/X) = R
      Long term capital gain = Q – R = S
      Income tax on capital gain = S x 20%

      CII was started in 1981-82, so purchase year would be 1981-82 and purchase price would be fair market value as in april 1981.

  8. krishnamurthy says

    Recently I made an HUF consisting my family members. Is it possible to make any change in the members of the HUF, by deletion or addition by me (I am the KARTA). I wish to include my daughter in the HUF. Also I wish remove my daughter-in-law from the HUF. Is it admissible

    • Pankaj Batra says

      @Krishnamurthy
      We have little knowledge on this subject. Please ask it on a different forum/website.

  9. sudhir kale says

    I have purchased one plot for rs 3,60,000 in 2005 and it is sold for Rs 1,20,00,000 in 2013, now i have one house at village grampanchayat area on my name and I want to purchase one house in pune city which costs around 1,20,00,00. pl. tell me about tax details.

    • Pankaj Batra says

      @Sudhir
      As you only have single residential property in your name at the time of sale of plot, you can take tax benefit u/s 54F.
      If you buy new residential house property for price more than sale consideration of plot, no tax would be payable.

  10. Ravi says

    Hi Pankaj

    I own a flat jointly with my wife
    I beleive a woman owning property gets a rebate on Property Tax. can she claim the reabte and in what proportion we will get the rebate since it is jointly owned

    Regards
    Ravi

    • Pankaj Batra says

      @Ravi
      There is as such, no extra benefit available to women on long term capital gains taxation.

  11. sonu says

    Hi. I own 2 Bighas of agricultural land in India bought for Rs. 85,000/- in 1990. Suppose I sell it for 2 crores and buy a few residential properties totaling 1.2 crores, in different cities of India and make FD of the rest in a bank, will there be capital gains tax liability on the sale of my agricultural land ? If yes then how much ? Also, if I buy shares of different companies and sell them for a profit after a year, will it attract taxation or not ? Thanks in advance. :-)

  12. Rajashri says

    Dear Sir,
    Thanks for the information. I have one query. I sold a non agricultural land on 17 April 2013 after holding it for more than 4 years. I had booked a flat in early 2009 for which the registration happened on 24 Dec 2009, but got the possession of this flat only in Feb-2013. Can I claim advantage of “reinvesting in house property” to save long term capital gain tax relating to these transactions? As the actual possession date is within specified limit of 1 year before the land sell transaction, Can I claim investment in this flat from the long term capital gain arising from selling of the land? As on the Income Tax website, it shows clearly shows that the act of giving possession is treated as transfer for the purpose of Capital Gain. Please advice in this matter.

    Rajashri

  13. Rajashri says

    here registration means registration of “agreement to sale” with the builder
    Rajashri

  14. Manu says

    A. My dad is transferring/gifting a piece of land to me later this year (September 13), which he had bought in January 11. Once ownership is transferred to me, I plan to sell it by mid of 2014.

    Question 1) what date will be considered to determine whether I pay STCG tax or LTCG tax on this transaction? Date of purchase (Jan 11) or date of transfer (September 13)?

    B. I took a joint loan (along with my wife who is also salaried like me) and purchased a flat in November 2013 (made a down payment) in an under construction apartment. We subsequently entered into an “Agreement of Sale” in Jan 2013 [Loan EMI also started from Feb 2013] and went throughout process of registration in April 2013.
    We have already paid for 6 months until July 2013, which started in Feb 2013.
    Builder says they will take issue “Letter of Possession” in August 2013.

    Question 2) can we both claim exemption on the Interest and Principal we have been paying through our EMIs??

    C. As mentioned in A above, if the land sale done in June 2014 will be eligible for LTCG tax.

    Question 3) Can I use the sale proceeds to make a partial payment towards my outstanding home loan (mentioned in B above) to get an exemption in the LTCG tax?

    Thanks in advance for you response Pankaj!
    Best regards,
    Manu

    • Pankaj Batra says

      @Manu
      1. As property is transferred from father, original date of possession (Jan 2011) would be considered for capital gain computation.
      2. Both of you can claim interest and principal income tax benefit. Benefit can only be taken from year of possession. Interest and principal portion would be divided in same ratio in which you contribute in the EMIs.
      3. In case possession of new property is taken within one year before sale of land sale, tax benefit can be taken u/s 54F. You can prepay home loan from sale amount.

      • Manu says

        Thanks Pankaj!

        I have a followup question wrt my question 2 above and three additional questions –

        Question 4) How does the year of possession defined for this purpose? In terms of papers, I have followings 4 documents with me – I) Agreement of Sale (Executed on Dec 22, 2012) , II) Construction Agreement (Executed on Jan 31, 2013), III) Sale Deed (Executed on Jan 31, 2013) and IV) “Statement of Encumbrance on Property” (Issued on Feb 5, 2013) .
        Does any of these 4 documents qualifies FY 2013-2014 as year of possession? If not, what does?

        Question 5) Let’s say month of possession is Dec 2013. Is it true that if the borrower has been paying his EMI since April 2013; His total EMI amount (April 13 through March 14) can be candidate for exemption, subject to other conditions met, when he files for his taxes for FY 2013-14?

        question 6) in question 5, What happens if the EMI for the borrower had started before April 2013? Can he claim benefit for the EMIs he paid before April 2013 as well? If yes, how?

        question 6) How is contribution of *each party* (In my case husband-wife) in EMI is determined? So far, the EMI has been getting deducted from *my salary account*. However, not a single rupee has yet been transferred from my wife accounts’ to mine. Nonetheless, at the end of this FY, we both intend to enjoy the benefit of exemption in paying the EMI to reduce our tax burden. Please suggest!

        Thanks a lot again!!

        • Pankaj Batra says

          @Manu
          1. None of the documents mentioned by you is for possession. Builder/Seller issues letter of possession when he hands over property to buyer. Date of such document is important here.
          2. Yes, whole amount paid in possession year would be eligible for tax benefit.
          3. Amount paid before possession year can be claimed in five equal installments starting from possession year. Say, interest in FY 2013-14 is 1.2 lakhs and interest paid before this year was 1 lakh, then 20K can be added to each year from FY 2013-14 for interest claim. So claim for FY 2013-14 would be 1.4 lakhs.
          4. If wife has not been paying anything in EMI, she should not claim anything for home loan benefit. Whole amount should be claimed by Husband.

          • Manu says

            Thanks a ton Pankaj! Hopefully, following will be my last question :)

            wrt your answer # 4 – EMI is getting deducted through automatic route (ECS) each month from *my account*. My wife transferred a lump sum amount in my account at the beginning of May 13. And she will do that again.
            I have been assuming that I need to calculate the ratio of our contributions to the EMI, based upon a calculation to minimize our tax outgo.
            Am I thinking something wrong? If yes, What should I do now to correct this?

            • Pankaj Batra says

              @Manu
              Do your calculations and get that perfect amount into your account from your wife :)

              As such there is no nothing wrong here, but in case scrutiny happens, your wife would need to prove that she actually paid that amount towards EMI. Transferring to husband’s account from where EMI are deducted can be accepted by them.

              • Manu says

                Thanks Pankaj! I get the answer and the drift as well ;)

                I will come back should I have any more doubts.

                Your guidance and time here is very much appreciated!

                • Manu says

                  Hello Pankaj, I need some clarification regarding ratio of contribution in the EMI b/w the co-borrowers (Husband and wife here). So let’s say, for current year, because of different tax brackets – It might be beneficial to split the burden in 75/25. However, In future(different FY) – Can the ratio be different than this – for example 50/50??

                  • Pankaj Batra says

                    @Manu
                    As per rules, it should be as per actual payment contribution, which may vary every year.
                    So if your wife is paying 25% porion this year and claiming benefit for same, she can pay 60% in later years and get benefit for same.

                    • Manu says

                      THANKS Pankaj!

                    • Manu says

                      I have been looking to find out answer to one more question but have been unsuccessful so far. So here I go – Let’s say total amount re-paid to bank against a home-loan, in FY is 10 lacs (8.5 Interest and 1.5 Principal) and note that husband and wife are re-paying as co-borrower.
                      Question –> Can the Interest and Principal burden be shared by co-borrowers in different ratios during same FY? in the above example – Can the Interest portion be shared by husband and wife as 50/50 and Principal in the ratio of 90/10?? OR either of one ratio 50/50 OR 90/10 will be applicable across Interest and Principal?

                    • Pankaj Batra says

                      @Manu
                      Home loan is paid back in EMIs terms, it would be inappropriate to say that wife only paid towards principal and husband towards interest (or vice versa). If you do such things for tax avoidance purposes, IT department may deny deduction if caught.

                    • Pankaj Batra says

                      @Manu
                      Home loan is paid back in EMIs terms, it would be inappropriate to say that wife only paid towards principal and husband towards interest (or vice versa). If you do such things for tax avoidance purposes, IT department may deny deduction if caught.

  15. Yogendra says

    My mother purchased a piece of land in 1989 for Rs. 42000/- through GPA.
    In 2012, the property was developed and 4 floors were constructed on it, incurring an expenditure of approx. 30 lakhs.
    Later, in mid-2012, property was self registered by paying applicable stamp duty.
    In March 2013, two floors (out of four) were sold to different buyers for approx. 42 lakhs.
    Remaining two floors are intended to be sold later.
    What would be my capital gain tax liability on already sold floors & to be sold floors?

    • Pankaj Batra says

      @Yogendra
      Purchase Year = 1989-90
      Purchase Cost = 21000 (half of the purchase price)
      Cost Inflation Index (CII) for purchase year = 172
      Construction Year = 2012-13
      Construction Cost = 1500000 (half of construction cost)
      Cost Inflation Index (CII) for Construction year = 852
      Indexed Purchase/Construction Cost = 21000 x (939/172) + 1500000 x (939/852) = 1767814
      Long term capital gain = 4200000 – 1767814 = 2432186

      Similarly capital gains on remaining floors would be computed.

  16. Kush says

    Hello Pankaj,
    I have an joint ancestorial residential house along with land belonging to my great grandfather which he had purchased in 1920s. All joint owners have entered into agreement with builder to sell the property in 2013. The builder has proposed 2 options. Either to get a apartment of comparable value each of 1cr approx. We will get possession of house only in 2016 or later depending on when its build. The other option is every year for next 5 years he will pay 20lacsp.a.
    How is the capital gain calculated in both cases. Option 1: I will not get house till 2016 or later, which year do i pay capital gain? Option 2: I will be receiving part payment in 5 years, how can i take benefit of sec54. and which year will i have to pay capital gain 2013 for 1cr as anticipated value all years partially or year 2013 when we enter into agreement?

    • Pankaj Batra says

      @Kush
      Income tax on capital gain would be payable in the financial year in which sale deed (property transfer registration in name of builder) of property is done.
      In case, new apartment is handed over within two years of transfer, you can save tax u/s 54.

  17. ramdas says

    is investment again in house properties , the only option to avoid capital gains taxation

    Is there any other investment opportunities like long term fixed deposits in govt sponsored programs like rural electrification or highways project bonds .

    or GOVT. BONDS even with small returns for senior citizens whose children are abroad

    • Pankaj Batra says

      @Ramdas
      Under section 54EC, one can invest into capital gain bonds issued by REC and NHAI to save tax on capital gains.

  18. Yash Mehta says

    Sir, i have one doubt in this respect.
    If an Assessee sells off his flat i.e. Property 1 (Long term Asset)-Residential house property at 61 Lakh and out of the sale proceeds he given loan to friends & relative of Rs20Lakh. Further he invests Rs 41Lakh from Sale proceeds of the Old Flat in New Flat i.e. Property 2 ( Cost of the new Flat is Rs70 Lakh) with 1 year of sale of Property 1. Further ,Assessee takes the loan of Rs30Lakh from Bank for making payment for New flat.
    Than my query is whether Assessee can claim Decution under 54 Section? to Extant of how much amount? Will there be any capital gain on the Assesee?

    • Pankaj Batra says

      @Yash
      Assessee can claim deduction u/s 54. First, he needs to compute long term gains from old house property sale. Say, indexed purchase price is 20 lakhs and gains are then 41 lakhs only. Now if new flat cost is more than the gains, no income tax would be payable.
      It does not matter if home loan is taken for new flat.

  19. Deepak says

    Dear Pankaj,
    Under right to acquire an asset when it is LTCG of 20% tax:
    1) CG is calculated as per indexation?
    2) Period is Agreement registered with builder and date of current tripatriate agreement?
    3) LTCG exemptions would be same as usual?
    My objective is to sell this property which is under construction and utilize whole amount to buy piece of land and construct a building. Wondering how will I show gain amount utilized for that as opposed to buying a single flat which is easy.

    Please help.

    • Pankaj Batra says

      @Deepak
      You can avail tax benefits u/s 54F. As property is under construction and possession is never taken, it would be just a capital asset and not a house property.
      In order to save tax on gains fully, whole sale proceeds have to invested into a house property or construction of a house.

      • Deepak says

        Thanks, Pankaj!
        Just want to know little more:
        1) whether whole sales proceed investment has to be done through Capital Gain Account of a bank?
        2) Purchase agreement is registered in my and mother’s name. Is there any way that my mother can get exemption separately?
        3) And whether I will have 3 years time from the tripatriate agreement to construct a building with multiple flats?

        • Pankaj Batra says

          @Deepak
          1. In case construction of new property is completed before last date of return filing for the year in which sale is done (e.g. if sale is done in FY 2013-14, cut off date is 31st July 2014), then there is no need to open capital gain account. But if not done, then whole sale proceeds needs to be deposited to capital gain account and payment towards plot purchase and construction should be done from capital gain account.
          2. Yes, each share holder in asset can avail tax benefit independently. Sale proceeds would be divided among share holders and then they can use it to buy/construct house property and avail tax benefits.
          3. As per section 54F, construction of new house property should be completed before end of three years from sale.

          • Deepak says

            Thank you again, Pankaj! You are doing this wonderful job for people like me. I will surely do something soon to help you keep doing such great work.

  20. De says

    Hello Pankaj,
    I have two queries;
    1) My father have sold an ancestral property, he want to reinvest in a residential property. The amount is not sufficient to buy new residential property(my father and I want to invest) can this new property be co owned by me along with my father, and my father can claim LTGT benefit.
    Can bank will issue the loan to me in such cases ( if I fall under loan eligibility)?

    2) can two people who have sold their properties can jointly invest in a residential property and claim LTGT benefit individually?

    Looking forward for answers.

    rgds, De

    • Pankaj Batra says

      @De
      1. Yes, new property can be jointly owned and your father can still claim tax benefit on his share of purchase cost. Bank can issue loan to you and there should not be any issue because of joint ownership.
      2. Yes, more than one people can jointly invest into a single property and claim tax benefits u/s 54 and 54F.

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