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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Shantanu Rastogi

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  • Thanks a lot. Things clearer. But my second query is do I have to pay separately for my commercial clinic and for my. share as owner of plot of the land on which building stands.

    • @Parag
      In case your commercial clinic is not being sold, but reconstructed, there won't be any capital gains.
      Whatever you receive from your share in plot sale, LTCG would be applicable on that.

  • I have a housing loan (taken in 2005) of 6 lacs. Recently I sold a plot with 2 lacs capital gains. If I repay Rs. 2 lacs ( to the extent of my capital gains) my housing loan, can I get tax exemption on my capital gains.

    • @Murali
      There is no tax benefit available on payment of home loan due from long term capital gains.
      Either you will have to buy a residential house property or invest into capital gain bonds to save income tax on long term gains.

  • Respected Batraji.
    I am a bit confused. Pl help. My LTCG on sale of house is Rs. 25.34 Lacs which I deposit in a Nationalized Bank under Capital Gain Account. Now I book a under constuction house of a reputed builder which may cost me rupees 33.25 Lacs.I understand that I am supposed to utilized this amount with the Bank by the end of two years from the date of sale of my house. I start paying instalements to the builder and builder fails to give me possession of new booked house within time frame. By the end of time frame only say 3 Lacs are left in my bank.Am I supposed to pay Long Term Capital Gain on rupees 3 Lacs (which is unutilized amount) or full amount of LTCG which is 25.34 Lacs.

    • @Arjan
      As your did not get possession of new house within two years, income tax would be applicable on long term gains. So in this case you would need to pay 20% income tax on whole LTCG (25.34 lakh).

  • Respected Shri Pankaj Batra
    I and my wife with 50% share have purchase a flat at mira road in the year sept 2003 for total cost of Rs 4,25,920 (Rs 212960 each)

    We have sold the above flat in june 2011 for a value of Rs 20 lacs.

    My wife has purchase a flat at new panvel in the year june 2009 jointly with son, I am not investing the gain amount in purchase of any property, beacuse the amount realised from the said flat has been utilised in the payment of loan obtained by my wife and son at the time of purchase flat at new panvel.

    If we both invest Rs 1.50 lacs each in the infrastructure bonds during this year, then kindly let us know how much tax we have to pay. during the fy 2011-12 I have no any salary income but may have bank interest around Rs 6,000 and my wife is working in NPCIL having salary income appox Rs 5 lacs

    Kindly let me know the capital gain tax payable during the year and when it has to be paid, whether any advance tax required to be paid by us.

    Kindly adivice in the matter.

    Thanking You

    Yours Sincerly

    Vijay Parab

    • @Vijay
      Below is computation for long term gains:
      Purchase Year = 2003-04, Purchase Cost = 425920, Cost Inflation Index (CII) for purchase year = 463
      Sale Year = 2011-12, Selling price = 2000000, CII for sale year = 785
      Indexed Purchase price = 425920 x (785/463) = 722132
      Long term capital gain = 2000000 - 722132 = 1277868
      Thus, each of you will have gains of around 6.4 lakh.

      If possession and registration of new panvel flat was completed before July 2010, then income tax benefit for that purchase cannot be taken as per section 54.

      If you both invest 1.5 lakh each into capital gain bonds before Dec 2011, then your taxable long term gains would be reduced to around 4.9 lakh.
      As your wife is already earning and have income of 5 lacs, she would have to pay 20% income tax on remaining long term gains of 4.9 lakh.
      As you have only interest income, you can reduce taxable long term gains by 1.74 lakh (1.8 lakh - 6000 as there is no income tax till 1.8 lakh for men) and pay 20% income tax on remaining 3.16 lakh.
      If your age is more than 60 years, you can even further take 2.5 lakh exemption limit.

      Each of you should pay 30% by 15th Sept, 60% by 15th December and rest of income tax by 15th March.

  • Hello Sir,
    As advised by my CA and Yourself I wish to open a Capital gains account (long term) in my bank, a leading Nationalized Bank, but the manager or the guys at the head office do not have the forms or know the procedure to do so as they dont have a single capital gains account in any of their branches and are busy searching for an old circular since 2 weeks. Where can I download or get all these forms, A,B,E,G or relevant forms as advised by you? Does each Bank have a different format and are forms downloaded from the net okay.Am I supposed to take a receipt from them clearly stating CGAS to avoid screw-ups on their part. Eagerly awaiting your reply. Thanking You,
    Regards,
    Rohith Shetty.

  • we brought a flat and it got registerd in october 11, now we want to sell our plot and repay the loan. how to deal with capital gains

    • @Manasa
      We are assuming that plot has been in your name for atleast three years.
      As you have recently bought residential flat, you can take income tax benefit u/s 54F. In order to take benefit plot needs to be sold within one year from flat registration. If cost of flat is more than selling price of plot, there won't be any income tax payable on long term gains. If cost is less, income tax benefit would be applicable in proportion.

      Moreover, u/s 54f following conditions have to be fulfilled:
      1. You should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
      2. If total residential houses owned by you is two (including new property), you should not buy another one within next three years of purchase. Or in next three years, total owned residential houses should not be more than two.
      3. New property should not be sold before next three years.

  • 1. I have purchase land amounting 2.00 lac January,2008 and sale it 5.50 lac on October,2011. is it taxable.
    2. Same F.Y. I Construct Residential a bulding for personal use, Approx Amountiing Rs.8.00 Lac.
    3. Same F.Y. I Purchase a Residential Building Amounting Rs.16.00 Lac

    How to save tax on profit of Sale of Land

    • @Sanjay
      1. Yes, gains from plot sale would be taxable as per below computation:
      Purchase Year = 2007-08, Purchase Cost = 200000, Cost Inflation Index (CII) for purchase year = 551
      Sale Year = 2011-12, Selling price = 550000, CII for sale year = 785
      Indexed Purchase price = 200000 x (785/551) = 284936
      Long term capital gain = 550000 - 284936 = 265064
      Income tax on capital gain = 265064 x 20% = 53012.8
      2. As you have already constructed and purchased new residential house properties for cost more than sale consideration of plot, you can get tax benefit u/s 54F.
      But following conditions needs to be fulfilled:
      a. You should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
      b. If total residential houses owned by you is two (including new property), you should not buy another one within next three years of purchase. Or in next three years, total owned residential houses should not be more than two.
      c. New property should not be sold before next three years.

      Other way to save long term gains is to invest into capital gain bonds within six months of plot sale.

  • Respetiem limit tocted Batra ji
    if I buy an under construction property through booking, what is the permissible time limit two years or three years.Please do reply.

  • Hi Sir,

    I purchased a flat in 2006 for Rs 13 lakhs (Agreement Value) and got in registered for only Rs 9 lakhs only( Circle Value or Government Value). Now i have sold this flat in oct 2011 for Rs 24 lakhs (Agreement Value) . The Registered value for this flat is being done for the value of Rs 21.50 lakhs .I have three question .

    1. Which value has to be considered for computation i.e should we consider AGreement value or Registered Value for calculating LTCG ?

    2. How much is the LTCG to be paid by your calculation ?

    3. Can i invest the Value in LTCG in purchase of a plot or should it be invested only to purchase residential house.

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