in Finance, Income Tax, India, Investment

How to Save Long Term Capital Gains Tax (LTCG)

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.

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1,634 Comments

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

        • @Pradeep
          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.

  1. 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?

  2. 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.

    • @Sandeep
      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.

  3. 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??

  4. 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?

  5. 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.

    • @Akand
      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.

  6. 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.

  7. 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

    • @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.

      • Thank you very much fo your reply.
        But
        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?

  8. Sir !! I had a old house which i got from my father on 1963 and i demolished it before selling without having proper knowledge of tax benefit and now it became a vacantlandtax and I m going to sell it..want to know how can I save capital gain tax from that property and I have no plan of purchasing another property or constructing a house…kindly provide info for reducing capital gain tax

  9. Hello Sir,

    We have property which was on the name of my father. My father has given the property to us by will (Vasiyatnama) in 2007. Father expired in 2008.

    Till the date we haven’t transferred the bungalow on our name.

    Now if we want to sell our inherited bungalow property and we are interested to sell against cheque payment only. In this situation, we need to know that, in context of Long Term Capital Gain that if we transfer our bungalow on the name of all heir / successor and then we sell it, can we get benefit of new residential proper (provided single property is there) + Bond (50 Lacs) + Indexation for every heir ?

    If such benefit are available for every individual, are they available if
    (i) we transfer the name of all heirs (Jointly for this bungalow & then sell it ? OR
    (ii) we make parts of bungalow and then transfer the name of each part on the name of each heir individually & then sell it ?

    Total 3 successor are their i.e.

    1) Mother
    2) Two Brothers

    Please guide us.

    Thanks & Best Regards,

    Sunil Shah

  10. Dear sir,

    I have sold a plot on 31.03.2016 for Rs. 22, 40,000, which was purchased in 2011 for Rs. 8,50,000. On calculation, arround Rs. 9,00,000 would be the LTCG tax.

    Last year during Nov’2015, I have entered in to a MOM with a builder for purchase of a flat for Rs. 62,00,000, for which I have already paid Rs. 24,80,000 as initial payment. This initial payment of Rs. 24,80,000 was made with personal loan from a bank & loans from relatives.

    Now, wish to repay all these loans from the proceeds of this property sale.

    In this case, what would be my tax burden? Is it “zero” ?
    kindly explain me.

    With best regards,
    Ramesh S

  11. I have only one daugther and I need around 25lacks for her higher (medical) education I am trying in India from last two years but we can’t getting admission in India because of open category. Now I am trying to admission in abroad. My question is can I sale my property and use my money 50% for dauther education and 50% in residencial property? (I was alloted property from Mhada in 1992-93. apprx. cost that time around 50k to 100k and now i sale for 40 lacs) Can I use sale amount without any tax to my daughter education

  12. I had purchased plot in 2002 and in 2011 to 2013 I had developed it in 6 flat, completion certificate was obtained in March 2014. 1 flat sold in march 2015, 3 flat in march 2016 and 2 in august 2016.
    Can I get exemption under sec. 54 for considering the sale of residential house apportuent to land.”, which was developed nd gave on rent for 2 months.

  13. sir, my mother planned to buy a house she didn’t have any assets(plot,house). so my father wanted to gift deed to my mother of his 6 year old purchased residential plot(site) by him. my father already own a house in his name. afterwards my mother sale the property gifted by my father and buy a house for that amount in her name obtained by sale transaction, shall she should pay LTCG(long term capital gain) tax? or my father should pay?. she is going to purchase first residential house.she is working as gov. teacher and tax payer.sir please answer me as early as possible.

  14. Hi Pankaj,

    I have sold my residential house and wanted to invest in a residential plot, once i buy the plot i will go for construction.. Am i eligible for capital gain tax savings? Please let me know..

    Thanks,

  15. I sold my residential plot during April 2017 for Rs.33 Lakh. I’m planning to buy another plot for Rs.55 Lakh by using Rs.25 Lakh out of Rs.33 Lakh.Remaining 30 Lakh (55-25), I’m planning to take loan. Please let me know whether I have to pay capital gains tax in this scenario.

    • @Amar
      In case you construct a residential house property on the new plot, you can avail tax benefits under section 54F.
      However this would only be applicable if you only have maximum one residential house property in your name before this property.

  16. i purchased a plot in 2005 for rs 1 lac sold it for rs 8 lac in 2014 and purchased another plot for rs 9 lac . how do i save L .T C. G. TAX if i have construction cost 10 lacs.

  17. Dear Mr. Pankaj Batraji,
    Your article and replies are exhaustive and highly informative but I need to know my query as it is not covered above threads. I have a property in Delhi measuring about 250sq yd. I am intending to sale a part of it and build a house on the rest of the area (by demolishing the old structure fully).
    The plot was bought in 1971 & the house was built in 1985 (no proofs/receipts of expenses on construction is available with me now). My queries are:

    1. How will the LTCG be affected and will I get any benefits for this construction?

    2. What proof does the IT dept need for the new construction part(as the same builder will do both i.e. buy, register his part and construct new for the same amount, no money being given or taken)?

    I hope you will resolve my issue and advise as early as possible since your all advice are quite exhaustive and prompt in guiding in resolving LTCG issue. If possible kindly email the response or inform when the reply is put on your blog. I am a senior citizen, if that is relevant. Thanks.
    With best regards,
    Dr. Goswamy

    • @Dr. Goswamy
      As per section 54/54F, if gains/sale consideration are used in acquiring/constructing a new residential house property, then tax benefit can be taken.
      First, part of land should be sold to builder and sale amount should be transferred and shown in transfer deed.
      Now, amount towards construction cost should be transferred to builder and receipts should be taken.