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:
- 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.
- 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:
- If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.
- 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
- 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.
Dear Batraji,
We sold a property ie., site (held for about 7 yrs) for 33 lakhs in May 2011 and bought a site for 22 lakhs in Aug 2011. The entire amount was transferred to Capital Gain Account in bank. Currently we are constructing a house worth 25 lakh in the newly bought plot and have already used the full amount obtained by selling site. The house will be completed in 2013 March.
Can you please inform if we have to file returns for this sale considering it as LTCG in 2012-13? If Yes should tax be deducted or should we claim deduction for the entire amount under section 54? Which form should we use?
@Kumar
As capital gains are earned in FY 2011-12, it should be reported in income tax return for this financial year.
You can avail tax exemption u/s 54F in income tax return, as amount has already been deposited into capital gain scheme account.
You should use ITR 2 form for return filing.
Thank You very much Batraji for your timely advice. Its been of great help.
I sold a residential property on 29th Dec’2008 with a capital gain of 29 lac which I reinvested in a residential property on 19thsep’2010 for Rs30lac and availed exemption on capital gain tax.can i buy one more residential property in july’2012 without losing the capital gain tax exemption availed in 2010?
@Ashish
If property sold in 2008 was not a residential house property, then as per conditions of section 54F, you should not be owning more than two residential house properties in next three years of purchase of property.
Dear Sir! I did mention that I the property sold by me on 29thDec’08 was residential.I reinvested the capital gain amount in Sep’2010 in a residential property which I hold today. That is the only one residential property that I own today. I want to know if I can buy one more property in July/Aug’12 ?-ashish
@Ashish
As sold property was residential house property (flat/house), there won’t be any limit on future buying because of that u/s 54.
Hello Sir,
I booked an under construction flat in mar 2008. I made the partial payment initialy builder and then in installment as it was under construction flat. So in march 2008 I paid 8 lakh , I paid installments till may 2011. Total amount paid to builder was 2350000. I sold the flat in October 2011, it was still under constructio and possesion was NOT received, I sold it for 2600000. Net profit is 250000 (white), Now, as i sold it after more than 3 years from date of booking, will it be a long term capital gain or as I paid installments till may 2011,it will be shot term capital gain
Please help
Regards, Ashish
@Ashish
As per income tax laws, as possession and registration was not done in your name, this won’t be considered as long term asset. And so whole gains would be taxable as short term gains as per your income tax slab rates.
Dear Sir,
I booked flat in 2008, did registration in 2008 and got possession in 2010. I want to sell this flat now (2012). So I want to sold it after more than 3 years from date of registration will it be a long term capital gain or as I paid installments till 2010,it will be shot term capital gain.
(3 yeras considered from date of registration or date of possession?)
Please help
Regards, Nilesh
@Nilesh
As per law, date of transfer (possession) is used for computation of capital gains. In some cases like DDA flats etc where possession was delayed, courts have also allowed registration date to be used.
Whether the capital gain from the sale of a single house could be invested in two houses (one in the same city of old property (say mumbai) and one outside the city (say thane)) to claim the Section 54 exemption?
Please help
@Jayesh
As per section 54, you can only invest into single residential house property to avail tax benefit.
Dear Mr. Pankaj
I purchased a residentail flat at Rs.7.25 lacs in Year 1994 and sold it at Rs.51 lacs on May, 12.
Can you please inform me how much will be capital gain and tax.
Regards
Dinesh
@Dinesh
Cost inflation index for FY 2012-13 has not been declared yet.
Please see a sample computation with CII for 12-13 assumed as 850 (change it to correct figure once its out):
Purchase Year = 1994-95, Purchase Cost = 725000, Cost Inflation Index (CII) for purchase year = 259
Sale Year = 2012-13, Selling price = 5100000, CII for sale year = 850
Indexed Purchase price = 725000 x (850/259) = 2379344
Long term capital gain = 5100000 – 2379344 = 2720656
Income tax on capital gain = 2720656 x 20% = 544131.2
I am planning to buy a residential flat for Rs.14 lacs in under construction and likely to get possession on Sept.2014. Bal. amount I will take bond.
Can I do it.
@Dinesh
If possession of new flat is received after May 2014, income tax benefit u/s 54 won’t be applicable.
Capital gain bonds also would need to be purchased before Nov 2012 (within six month of sale).
I want to know:
1. If a make a payment of Rs.5 lacs as advance now , then will I have to open a capital gain account and make balance payment to the builder from that account.
2. can I withdraw cash from the account and make the payment for registeration.
@Dinesh
1. If possession of new property is not taken before 31st July 2013 (last date of income tax return filing), you need to open capital gain scheme account and deposit unused capital gain amount into it mandatorily in order to take tax benefit u/s 54.
2. Any withdrawal over Rs.25,000/- should be affected by Bank, only by crossed DD.
3. Agreement with builder does not provide tax benefit. Possession would be required.
4. If possession is not taken within two years, no tax benefit would be available u/s 54 and whole gains amount would be taxable @ 20%.
till when we should open capital gain account.And should we deposit all the amount of sale consideration or capital gain amount.
@Dinesh
You would need to open capital gain scheme account before 31st July 2013. As you sold a residential house property, only capital gains would need to be deposited into this account.
Upto what time we should open capital gain account.
before you told that we should get possession before May,2014 and now you are mentioning 31st July,2013. Kindly clarify
@Dinesh
Last date for opening capital gain scheme account in your case would be 31st July 2013. This would only be applicable in case possession is not taken before this date.
Last date for getting possession for residential property against which tax benefit is taken would be May 2014.
In case possession is not taken before income tax return last date (31st July 2013), Section 54 would only applicable if you open a capital gain scheme account.
I want to know whether I can buy a property now for around Rs. 15 lacs and sell it say after 6 months for Rs.18 lacs and then buy another property, which can be kept for long term.
Also, till when I can buy a property to avail tax benefit.
@Dinesh
Yes, you can buy property for 15 lacs now and sell it after 6 months. But this would result in short term capital gains which would be taxed as per your slab rates.
As told in earlier reply, you need to get possession of new property within two years from sale for tax benefit.
Also, by making agreement with the builder, will it not be considered for income tax benefit.
And, if the possession is given after May,14 will the whole amount be taxable or only for balance payment to be paid.
Sir,
I am planning to sell my land that i purchased in 2009. I have bought an apartment in 2006 which is under a loan from HDFC. can i use the proceeds of selling the land to repay my loan and avoid capital gain tax.
@SG Prasad
There is no deduction available on paying home loan from capital gain amount.
Dear Mr. Pankaj,
My fathers had purchased a land in my name in 1989. I have sold this land in 2012. I already have two residential property in my name in the city where I had sold the land. I am interested in buying a residential flat in another city and also investing in NHAI/REC Bonds to save the remaining.
Please advise under what section (54F etc) or how can I save on LTCG. Would it help me saving LTCG by buying this third new property and also investing the remaining in bonds. ?
@Rajat
Section 54F won’t be applicable to you as you already owned more than one residential house properties at the time of sale of land.
Now you can only save income tax u/s 54EC by investing into capital gain bonds (NHAI/REC).
Thanks for your reply. In addition the other two properties has still not been handed over and registered. However within a year or so it would be handed over.
Please advise whether I can buy a new property as well as invest the remaining in capital gain bonds
Also please note I have paid a part of my Loan in one of the properties using the capital gains. Would the paid amount as home loan be taxable ?
@Rajat
There is no tax benefit on paying loan from capital gains.
@Rajat
Under section 54F, you cannot even own more than two residential properties within next three years of new property purchase.
To explain it, one can at max own one residential property at the time of sale of asset. Now to get tax benefit, he buys one more residential property, so now his owned residential properties would become two (in case he already owned one). So in next three years from possession of new property, he cannot buy more residential house properties. Also he cannot sell this residential property for next three years.
Thanks a lot Mr Pankaj. As the properties are still to be registered can I get it registered in my parent’s name after a year when I get handover. And now go ahead with the new property in my name ?
@Rajat
If you can do that, it would be fine.
Dear Pankaj,
i bought a residential plot in Nov 2009 and selling it in this month.
What type of capital gains tax applies and what %? how can i avoid it?
I dont have any plans of buying a house or constructing house.
@Dev
As plot is being sold by you before three years, it would be considered as short term capital gains.
Whole gains (selling price+any brokerage – (purchase price+stamp duty/registration fees + any brokerage)) would be taxable as per your tax slabs.
One of my colleague has parental Agricultural land which has been sold to a corporate as they are about to set up a industrial unit there. It was sold with an agreement that when ever they will buy land in the near by area with the increased rate than given to my colleague they will gat the incremental amount.
Accordingly my colleague has received incremental amount which in my opinion is long term capital gain.
I want to know how can tax benefit be availed as per provisons of Income Tax Act.
@Archana
If the sold land was outside the jurisdiction of a municipality area or not even within eight kilometers of municipality area, it won’t be counted as capital asset and thus there won’t be any income tax liability on gains from sale of land.
In case above is not true, then income tax would be payable on long term gain with indexation benefits.
Section 54B, 54F or 54EC can be used to save income tax.
As new residential land has already been bought section 54B would apply for tax benefit. If cost of new land is more than capital gains (computed with indexation method), there won’t be any income tax payable. As sale price for old property is equal to new land purchase, there won’t be any income tax payable.
It should have been bought within two years of sale from old sale. Lock period for new purchase would be three years. If new land is sold before three years, capital gain benefit would be void and you would have to pay 20% income tax on long term gains.
HI pankaj
we have sold a residential property and now want to buy one land .
I understood that if i sell residential property i am eligible to buy another residential property to avoid the capital gain tax. or else i can either put that amount in REC bonds.
doubts:
1. will i be able to set off my gain if i sell my residential property and buy one land?
@Vignesh
No tax benefit if you buy land only. However if you construct residential property on this land within three years, tax benefit can be taken.
I am constructing a house in a plot that was bought before 5 years. now i am selling a land that was settled by my father before 2 months for 15 lacs. can i use this amount for construction. will i get tax exemption or i need to deposit money in bank for 3 years
@Kavitha
You can get tax benefit for construction of house u/s 54F in your case.
In cost of construction is more than than sale consideration of your share in land sold, there won’t be any income tax payable.
Construction should complete within three years of sale.
If construction is not completed before 31st July 2013, you need to deposit unused amount into capital gain scheme account.
Thank you very much sir.
Hi Pankaj
My mother has undivided share (residential) from her father, she plans to to sell the same. It is LTCG, can she buy two new residential houses one for me and other for my sister.
@Balaji
Yes, its LTCG and income tax is payable @ 20% on long term gains computed with indexation benefit.
She can save income tax on gains by buying/constructing residential house property u/s 54 or into capital gain bonds u/s 54EC.
She would need to buy new property on her name only. If her son and daughter wants to buy houses, she should first gift property to them and they can sell and save income tax by investing into property.
Thanks Pankaj
The clarification I need is as follows:-
1. I bought a house in 2006 largely through a bank loan.
2. I sold the house in July 2011.
3. Using the principle + capital gains + bank loan, I bought another house in Jan 2011. Using the T-1/T+2 rule, I was exempt from any tax on LTCG.
4. Now I would like to sell this house in Jan 2013 and move to a smaller house to reduce my EMI burden.
Given that the second house was not in my possession for 3 years (It was only for 2 years), would I need to pay tax based on short term CG
OR
Is there a rule, a way where the back to back transactions have a exemption of some kind or can be treated as LTCG ?
@Indrnil
As you want to sell new property (against which exemption was take u/s 54), before three years, then for computing gains on this property, cost would be reduced by amount of capital gain exemption taken u/s 54.
Short term gain = property selling price – (property buying price – capital gain exempted earlier u/s 54).
Property details:
The ancestral property of the year 1920 has been passed on to my grandfather’s generation in the may 2012 and my father and his two brothers received it in the month of august 2012. My father and his two brothers got 270 sq yards of urban land each. Now I wish to purchase the land of 270sq yards from one of my uncle [dad’s brother]. The present government value of the property is 27k per sq yard and the market value of the property is 60k per sq yard. I heard that there would be nearly 20% to 30% of income tax on my uncle on his sale proceeds. So could you please clarify me the total income tax / capital gain that my uncle be liable to pay in detail. I would really appreciate your response. Please explain
Kumar
@Kumar
If your uncle sells house property to you, he would need to pay income tax on capital gains earned from the sale. Income tax would be payable @ 20% on gains with indexation benefit.
Below is the method to compute long term gains and income tax. As property was inherited and it was purchased before 1981, purchase year would be assumed as 1981 and cost would be fair market value as in 1981. CII for 1981-82 was 100. CII for 2012-13 has not been announced yet.
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%
One way to avoid income tax is to get land gifted to you by a gift deed without any consideration and in return you can gift an X amount to your uncle . There won’t be any income tax payable on gift received from uncle and vice versa.
One
dear mr batra, we have purchased one residential plot in 27.07.2005 in 500000 (en.boundry ex,transfer ex and brokrage) and now we sold in 8.8.2012 in 1110000 so what is tax calculation and if we invest in a resi plot amt 1500000 than what is the position of ltcg——plz tell me sir
@Raj
Cost inflation index for 2012-13 has not been declared yet. In below calculations, it has been assumed as 850. Please change it once its announced.
Purchase Year = 2005-06, Purchase Cost = 500000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2012-13, Selling price = 1110000, CII for sale year = 850
Indexed Purchase price = 500000 x (850/497) = 855131
Long term capital gain = 1110000 – 855131 = 254869
Income tax on capital gain = 254869 x 20% = 50973.8
There won’t be any tax benefit on investment into a residential plot, but if you construct house on it then benefit can be taken u/s 54F.
Sir Good evening.
It is quite appericiable that you answer all quaries with a lot of patience. Hats off to you !!!!.
Sir, I had bought a flat in 13.00 lakhs in 2001. I sold the same at 37 lacs in 2006 incurring a LTCG of 24 lacs. I invested 30 lacs (including LTCG of 24 lacs ) in buying another flat in 2009 (within 3 yrs ). NOW i need to sell ,urgently , the latest flat in 2012 (not completed 3 yrs ) in 45 lacs. What will be the implication of STCG / LTCG on previous or new flat ? Kindly clarify. Regards and thanx.
@Rakesh
First thing first, your LTCG in 2006 was not 24 lacs but around 21 lacs as per indexation benefits:
Purchase Year = 2001-02, Purchase Cost = 1300000, Cost Inflation Index (CII) for purchase year = 426
Sale Year = 2006-07, Selling price = 3700000, CII for sale year = 519
Indexed Purchase price = 1300000 x (519/426) = 1583803
Long term capital gain = 3700000 – 1583803 = 2116197
Now in order to save income tax on this gain fully, you needed to invest atleast this 21.16 lakh into new residential house property. As you bought a flat, possession for same should have been taken within two years from sale as per section 54. So your assumption of tax benefit was not valid by buying a flat in 2009.
Now as per section 54, in case new bought property is sold before end of three years, tax benefit becomes invalid. First it would be short term capital gain and second purchase price of this property would be reduced by tax benefit on long term gain taken.
Short term gains in selling latest flat = 45 – (30 – 21.16) = 36 lakh.
This whole amount would be added to your taxable income and taxed as per your slab rate.
Dear Pankaj sir, thank you very much. I am obliged by your quick response. God bless you. regards.
I am senior citizen aged 60 years and have sold my ancestral URBAN agricultural land in October-2011 and have kept the amount in capital gains account. Now My wife who is also a senior citizen desires to sell her own ancestral RURAL agricultural land. Both the land holdings are Long term holdings. Now my question is, Can I save my LT Capital Gains Tax by purchasing the land owned by my wife? I wish to follow proper legal land registration formalities and give the sale amount through bank cheque. Is is legally correct proposition or not? Kindly Advice.
@Mohan
As such, you can buy property from your wife. There should not be any issue in that.
You can claim tax benefits u/s 54B.
hello sir
How to Calculate STCG on Gold Coin Purchase value 116600 & Sale Value 131900, Purchase Dt : 21/06/11 & SD : 09/08/2011 and he deposited the sale amt to Residential Flat , how the Working will
@Kiran
As gold is sold before end of three years from purchase, gains would be counted as short term capital gains.
Short term capital gains = Sale price – purchase price.
There is no tax benefit available in case of short term gains. Whole gains would be added to taxable income and taxed as per slab rates.
I have a joint flat in my name and one more in my name is under construction.
Can the sale proceedings from land ( long term holding) be partially adjusted to avail of the tax benefit as the flat is still under construction.
@SCGupta
If possession of under construction flat is taken within two years of land sale, you can take tax benefits u/s 54F.