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:
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 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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I sold 2 apartments in 2009 April and Capital Gains amount is deposited in a Bank to buy land and construct 1 house which is in process. Can I give a contract to a builder to buy land and construct a new house and use the full capital gains+ may be another 10 lacs over? Is this allowed?
Another question:
I sold 1 land in 2011 April. Can I buy another house using the capital gains or can I put the money in any bonds or any other instrument and save taxes?
please assist me.
Babu
@Babu
If you want to take three years duration, first plot must be bought in your name, after that you may contract construction to a builder.
If land is bought by builder and house is constructed and then sold to you, two years time-frame needs to be followed.
To save income tax on gains from newly sold land, you can again invest into a new house u/s 54F. But there is a condition that you should not be owning more than one residential house property at the time of buying new house. Plus total number of houses owned by you should not be more than two in next three years too.
Tax can also be saved by investing into capital gain bonds u/s 54EC. Max investment allowed is 50 lacs per financial year.
To save tax fully, whole sale consideration amount needs to be invested under 54F and 54EC. if less amount is invested, income tax would be chargeable proportionally.
Dear Pankaj
I had purchased land for about 2 lacs in 2005 and sold for 21 lacs in April 2011. I would like to take your advise and would like to invest in 54EC. What is the amount I should put in 54EC. What is the time frame to invest? 6 months or 1 year from the date of Sale?
@Babu
To save tax fully, you should invest 21 lacs within six months of sale into capital gain bonds u/s54EC.
Is it possible to sell flat and buy an office space with the proceeds thus by saving LTCG if the 5 year criteria is fulfilled?
@Manu
In case an office space is bought from sale proceeds received on flat sale, no tax benefit would be available. Hence 20% income tax would be payable on long term gains.
Dear Pankaj,
I bought an apartment in Bangalore from the builder in 2005. I paid the full amount for the apartment in 2005. The apartment only got constructed in 2011. I will be taking possession in 2011. If I sell in 2012, will it be a long term capital gain or short term capital gain.
Thanks
@Veekay
It will be short term capital gain, if you sell before completion of three years from date of transfer to your name (registration) or possession.
HI Pankaj
Appreciated , to give very quick and helpfully answer to us.
i have one question ,i have 2bhk flat in pune.
i am selling my own flat (2 years old) .my purchase cost is 25laks
and selling cost is 36laks. so how i save my short term capital gain?
please suggest me the process for other investment plan.
@Rahul
Income tax on short term capital gain cannot be saved.
Whole gains will be added to your taxable income and taxed as per your slab rates (max 30%).
Dear Mr. Pankaj Batra,
1] If the property is to be purchased within 6 months or before march is it necessary ot open capital gain account?
2] Is it possible to invest partially in bonds and partially in property?
3] Is it acceptabl;e to buy old property?
@PBJ
1. Its not mandatory to open capital gain account if new property is transferred in your name before income tax filing last date (31st July). So if property is sold between April, 2011-March, 2012 and new house is not registered in your name by 31st July, 2012, capital gain account needs to be opened.
2. Income tax laws are silent on simultaneous usage of section 54/54F (new house purchase) and 54EC (capital gain bonds). I would advice you to use both with caution and take advise of a tax professional/CA expert in property matters.
3. Yes, you can buy an old property (resale).
thanks pankaj,
means u suggest me, to purchase resale property in same financial year and save the short term capital gain.is it right?
@Rahu
I did not suggest you to purchase resale property, as no purchase will save you from income tax arising due to short term capital gains.
Looks like you are confused with an answer to other person's(PBJ) query.
Shri Pankaji,
Thanks for the promt reply. I shall definatly consult my C.A. about Investment in 54/54F & 54EC Prabhakar Jagtap
I sold a property in April 2009, the capital gain amount which is 30 lacs, I put in 2 year FD with the scheme B with the Bank.
I have already signed an agreement for land to buy and complete a house in that land ( which is half built by the current owner). Should I finish the whole construction by April 2012 or can I stretch upto July 2012?
@Babu
In case of construction of house on your own land, you can stretch only upto three years from date of sale of old property, which ends in April 2012.
Is it a must that I should complete the registration of property in my name or just use the funds within 3 years ie before April 2012? I can pay to the contractor 30 lacs before April, but the house could be ready only may be in June or July. Is this allowed?
Another question:
Can I use the Capital Gains, as mentioned earlier 30 lacs and another Capital gains I made through land sale ( not house) in April 2011 and use the both the Long Term Capital Gains into 1 residential property? Is this allowed?
@Babu
Yes, its a mandatory condition that you complete registration of property and possession before end of three years.
It is allowed to use gains from two assets to buy/build a new residential property. Tax benefit can be taken against both the gains here.
But in case of land sale, section 54F will apply and you will have to follow its other conditions.
Respected Batraji
A brief clarification is solicited please.
(a) Is LTCG gain tax charged on the full amount of Gain or charged on the unutilized amount left in the LTCA with bank?
(b) Also the new apartment is being built with my money by the builder, am I entitled to three years time limit instead of two years for possession /registration purpose. Thanks
@Savi Chawla ji
1. Income tax would be charged on gain's un-utilized amount left after purchase of new property.
2. If you also own the land of new house (i.e. there is also land/plot registration in your name) then you may take three year's time limit.
I BOUGHT LAND FOR RS7LACS AND CONSTRUCTED 2000SQ/FEET IN 2005.NOW IF I SELL IT FOR 40 TO 50LACS HOW TO SAVE CAPITAL GAIN TAX. FOR CONSTN I SPENT RS20LACS.NOW I WANT TO SETTLE IN MY HOMETOWN. SO I WANT TO BUY HOUSE THERE. I WAS TOLD IF I SELL ABOVE 30LACS I HAVE TO PRODUCE INCOMETAX CLEARANCE CERTIFICATE TO REGISTER OFFICE.PLS ADVICE
@Malika
Indexed cost of your house in 2011-12 comes out to be around 42.6 lakh.
Purchase Year = 2005-06, Purchase Cost = 2700000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, CII for sale year = 785
Indexed Purchase price = 2700000 x (785/497) = 4264588
So if you sell it below this amount, there won't be any capital gains and no income tax would be payable.
But if its sold above 42.6 lakh, differential amount would be capital gains.
Say if Selling price = 5000000, then Long term capital gain = 5000000 - 4264588 = 735412. Income tax on capital gain = 735412 x 20% = 147082.4
To avoid income tax on this gain, you can buy a new residential house property for value equal or more than this gain (7.36 lakh).
THANKS FOR UR PROMPT REPLY.ACTUALLY I PURCHASED LAND FOR Rs 7 LACS. REGISTRATION CHARGE WAS 80000. THEN I CONSTRUCTED 2000 SQ.FEET IN 2006.PLS CLARIFY. SUPPOSE IF I SELL FOR Rs 40 LACS . AND THEN IF I PUCHASE A LAND OR HOUSE FOR 20 LACS WHETHER I HAVE TO PAY TAX . FOR CONSTRUCTION WHAT PROOF I HAVE TO GIVE BECAUSE I DIDNOT HAD CONTRACTOR . I DID IT WITH DAILY WAGES WORKERS.
@Mallika
In case you sell it for 40 lacs and you can show house construction expense in any way like building material bills etc, there won't be any capital gains and no income tax.
Sir
On Sep 26th I had asked a similar question. Original cost is 29L in 2003 and sold for 85 in 2011/2012. The indexed cost was 51L with a gain of 34L. As an answer to this you had indicated that the whole proceeds (85L) had to be re-invested in a new property and not just the gain (34L). Just a little confused on the answer above which says on the gains (about 7L) has to be invested. Can you please clarify on this?
@Chandra
Taxation is different in case of sale of a residential built up house property and any other capital assets.
In case of residential property, section 54 applies and to save tax fully, only long term gains part has to be re-invested.
But in case of all other capital assets (plot, commercial property, unlisted stocks, gold etc) section 54F applies, under which whole sale consideration has to be invested to save tax fully.