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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.


1,500 Responses

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  1. vicky says

    Hi Pankaj and Team,

    I bought a villa in a gated community, the land was registered in my name in Dec 10, then the builder constructed the house and i have the possession certificate of Mar 13.
    The total cost (land/construction/ST/registration) came down to Rs 26,40,000/- I also have a loan of Rs 10,00,000 on the same from Mar 12.
    Now I am selling the house for Rs 30,50,000 /- in Jun 14
    How do I calculate capital gain tax on this, will it fall under long term or short term.

    • Pankaj Batra says

      @Vicky
      As land was purchased before three years of sale, it can be assumed as long term capital gain case.
      Below is a sample gain computation example. CII for 2014-15 has not been declared yet, its been assumed as 1000 below.

      Purchase Year = 2010-11, Purchase Cost = 1500000, Cost Inflation Index (CII) for purchase year = 711
      Construction Year = 2012-13, Construction Cost = 1140000, Cost Inflation Index (CII) for Construction year = 852
      Sale Year = 2014-15, Selling price = 2050000, CII for sale year = 1000
      Indexed Purchase/Construction Cost = 1500000 x (1000/711) + 1140000 x (1000/852) = 3447733
      Long term capital gain = 2050000 – 3447733 = -1397733

      In above case, its a loss not a gain. If as per actual computation it comes as gain, 20% income tax would be payable on this gain.

      • vicky says

        Hi Pankaj, thanks a lot, a couple of questions
        1st. even though I got the possession in Mar 2013, this will still be seen as long term capital gain as the land was registered in Dec 2010
        2nd. in order to calculate the exact gain/loss, i should break up the construction and land cost and do the math as shown above.
        3rd. the land cost will be based on the registered amount or the actual amount i paid to the builder for which i have a receipt

        regards
        vicky

        • Pankaj Batra says

          @Vicky
          1. There is not much clarity on this as per tax laws. As you bought land in 2010-11, you had capital asset and already incurred cost, so it should be long term gain.
          2. Yes, you should separate cost financial year wise and then compute indexed cost in sale year to compute gains.
          3. Land cost should be cost mentioned on sale deed. Payment to builder should also be same (unless there is some cash element involved)

  2. aj says

    Hi I sell a plot for 56 lakhs in march 2014 and I havepurcahse it for 36 lakhs a sper the cost of index valuation.I am getting a LTCG of 20 lakhs & in march I purchase a plot for 3.5 laks and i have spent 10 lakhs in construction till date.

    How much LTCG tax i have to pay

    Regards

    • Pankaj Batra says

      @Aj
      Invested Amount = 13.5L
      Non-Exempted capital gains = 20L x (1-13.5L/56L) = 15.2L
      Income tax on non-exempted capital gains = 15.2L x 20% = 3L

  3. ST says

    Hi,

    I bought a flat that in 2001 for price of 6,31,890 (+ stamp duty = 16700 + 30,000 as other expenses asked by the builder at possession). I sold this flat in June 2013 for 55 Lakhs. I purchased another under construction flat for 1.23 Cr by making initial down payment of 20% in Feb 2013 and registered the same in July 2014. The payments are to be made as per the construction linked plan with possession being available in June 2017. Some of the money from the proceeds of the old house have been utilized for payment of new house and remaining amount is deposited in capital gains account.

    Will I have to pay any capital gains tax

    • Pankaj Batra says

      @ST
      As per section 54, in order to claim tax benefit, possession of new house property should be taken within three years of sale. If you get possession in June 2017, that is 4 years from sale, you would be denied tax benefit.
      In that case, you will have to pay taxes on capital gain.

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