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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Dear Mr Pankaj,
My parents are planning to sell two plots, and the selling price of each of these plots is 50L. The plots are in my mother's name.
I heard somewhere that as per Sec54F a person is eligible to buy a flat or a house apart from the one which they own currently to avoid LTCG tax completely. now if that is the case they already have a house which is under my Father's name, Will my mother be eligible to buy two properties to avoid LTCG tax on both the sale proceeds.
@Suresh
Below are the conditions applicable for section 54F:
1. Possession of new property must be taken within two years from sale of old property.
2. Your mother should not be owning more than one residential house(flat/house/apartment) at the time of buying new property. If your mother is not owning any residential property, then she can buy two new residential house properties to save tax on plot sale. Now as total residential houses owned by her will be two (including new property), she 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 properties should not be sold before next three years.
As your father is owner of existing house, your mother can still own max 2 house properties and claim tax benefit.
Dear Mr Pankaj,
Thanks a lot for the clarification on Sec54F.
Regards
Suresh
Mr Pankaj,
I am holding a property in joint with my mother. If I execute a gift deed/ release deed and sale the same property immediately. What is tax implication on mother share gifted/transferred i.e
Will It be considered as long term or short term?
Can I invest it in other property to save tax?
Regards,
Nilendra C
@Nilendra
If before selling property, you mom transfer her share to you through registered gift deed, she won't have any tax liability on property sale.
It will still be long term gain (if total ownership period is more than three years). Gains on your mother's gifted portion would also be computed from date of actual buying of property and not from date of gift.
Whole capital gain would be applicable to you only and you can invest into other property to save income tax u/s 54/54F
Hi Pankaj,
In this reply you stated that a gift deed can be executed to avoid tax. I face a similar problem;
- My father wants to gift me a part of his share in a property willed to us by my mother in June 2011.
- We will be selling this property by March 2012.
- The property is ancestral and hence in my mother's name for the last 40 years.
- We were recently told that by our auditor that u/s 49 gift (as per gift deed) is permitted under Income Tax Act without tax implications.
- However he has said that there is no case of the Income tax department accepting a registered release deed as a gift as a result of which they may claim that this is a transfer of property and tax me with Short term Capital Gains tax after the sale in March.
- Out advocate is saying that an appropriate instrument of transfer is the release deed and not a gift deed since this is merely a transfer of undivided share of land and building to which I am already an owner.
Please suggest what we should do.
Thank You.
@Srinivasa
Capital gains computation for ancestral property transferred to your name has to be done from actual date of acquisition by your ancestors.
So lets say, your mother (or your grandparents) bought a property 40 years ago and its now in your name because of release/transfer deed. If you sell it, it would be a long term gain for you and purchase year of property would still be 40 years back in LTCG computation.
As its a part of will, it will be family transfer and won't be a gift deed. But I don't think it would attract STCG on sale.
Dear Mr. Pankaj,
My parents are senior citizens. They currently own a flat, which in registered in both their names.
They bought a plot of land for Rs.60,000 in the year 1992 whose value has now appreciated to around Rs.35,00,000. The plot is co-owned by both of them. Now, they have decided to sell this plot of land.
Also, my mother is to inherit around Rs.40,00,000 in the next financial year (after April 2012).The inheritance will come from the sale of property left by her deceased father.
1. With the new tax code becoming applicable from April 2012, what would be the best time to sell the plot, so that they have to pay minimum capital gains tax. Should they sell the plot before April 2012 or after April 2012?
The procceeds from the sale are going to be used to buy agriculture land and to build a house on it. Both the land and house are going to be registered in my fathers name. How much tax would thay have to pay? Can my father claim any exemption from capital gains tax?
2. Is inherited money subject to capital gains tax. Would that be considered to be a STCG or LTCG. How much tax would my mother have to pay?
The inheritance is going to be used to buy a flat in her name. Can she claim any exemption from capital gains tax?
@Suresh
Once direct tax code, is implemented, for long term gain instead of flat rate of 20% of gain after indexation benefit, new concept has been introduced. Now gain after indexation will be added to taxable income and taxed at per the tax slab. So income tax rate would go upto 30% from earlier 20% in case of high amount of gain. So it would be better to sell plot before April, 2012.
I am assuming that your father and mother don't own any other residential house property in their names other than a flat owned in joint name.
Gains and income tax computation for plot sale:
Purchase Year = 1992-93, Purchase Cost = 60000, Cost Inflation Index (CII) for purchase year = 223
Sale Year = 2011-12, Selling price = 3500000, CII for sale year = 785
Indexed Purchase price = 60000 x (785/223) = 211211
Long term capital gain = 3500000 - 211211 = 3288789
Income tax on capital gain = 3288789 x 20% = 657757.8
Each your father and mother would have to pay 6.58 lacs as income tax for gains earned, in case they don't take any tax saving action under section 54F/54EC.
If new house is built only on your father's name and it costs more than 17.5 lacs (his share of sale consideration of plot), your father may not need to pay any income tax.
Capital gain computation for inherited property by your mother will be done same as her owned property, but original purchase year and price would be considered (as paid by her father). And if her father had owned property for more than three years, it would be long term gain.
To save income tax on inherited capital gain, she can either buy a new house or her name or invest into capital gain bonds.
Thanks for putting it out so nicely.
However, regarding the sale of plot you say that both my father and mother would have to pay 6.58 lacs each.
Woudnt my father and mother have to pay LTCG on their share of sale consideration of the plot which comes to (3288789 / 2 = 1644394.5) each and the tax to (1644394.5 * 20% = 328878.9) each.
@Suresh
Sorry for the typo and confusion.
Total income tax would be 6.58 lacs, which have to paid in total by your father and mother, in same ratio in which they owned property.
It would be 3.29 lacs each in case of 50-50 ownership.
Recently I sold my house with good long term capital gains. I have booked a flat 4 yrs back and it is still under construction. Possession of flat will be in mid 2012. DO I have to pay LTCG tax or can I show the LTCG invested in my already booked flat whose possession is in 2012?
@Anjvik
If possession of new house is within two years of date of sale of earlier house, you can claim income tax benefit u/s 54.
To save tax fully, new flat cost must be more than gains earned from old house sale.
Dear Pankaj,
Very informative article. I surfed through every post, but I have somewhat different query.
With reference to your comments for @Anjvik on 12th December, I had purchased a flat in 2004 and sold in December 2011 with capital gain of 26 lakh as per indexation some 5.2 lakh of LTCG I will have to pay. My query is (1) I have booked a flat in December 2009 and possession of the same will be in August 2012. the sold property was owned by me solely, however the new flat under construction is jointly owned with my mother. Can I claim LTCG exemption against purchase of this new property which is under construction? (2) What is beneficial to pay tax and invest remaining amount into AAA rating schemes who are paying almost 10.5 to 12% of interest? Honestly speaking I am not interested in buying another property as I feel there will be correction in prices. Rather I am much interested in buying agriculture land. Are there any tax benefits for buying agriculture land? Thank you in advance.
@Deepak
You can claim LTCG exemption against new property under construction even if its in joint name.
Cost of your share in new property should be more than LTCG, in order to save tax fully. Possession of new flat must be taken before Dec 2013.
If possession of flat is not taken before 31st July, 2012, you would need to deposit LTCG into capital gain scheme account.
As you have already purchased a new flat, it make sense to save income tax on LTCG by claiming exemption u/s 54.
There won't be any tax benefit available on buying agricultural land.
Another option to save tax is to invest into capital gain bonds u/s 54EC.
Thanks Pankaj for valuable information. Just one more query.
You said "Cost of your share in new property should be more than LTCG, in order to save tax fully." How do you derive to this number, as entire amount is paid by me only and not by my mom. Plus there is loan of 18L which I have started paying EMIs. If you mean 50% of purchase of flat, then definitely it is not more than LTCG. In that case I will not save tax fully, but on the difference amount, I will have to pay tax, right?
@Deepak
If you paid entire amount on new flat, you can show same and claim tax benefit for same.
Dear Mr. Pankaj Batra
My earlier query has been already answered by you.
In that connection, kindly let me know is this working possible for the calculation of LTCG on Sale of Flat in year 2011 Purchased in the year 2003-04
Sale Value Rs.10,00,000 less Purchase Value Rs. 2,12,960 = Gain Rs. 787040 Income Tax @10% Rs 78704 + 3% cess.
Kindly advice into the matter.
Thanks
Yours Sincerely
Vijay Parab
@Vijay
Long term gains on property can only be computed with indexation rule and rate of income tax will be 20% after this computation.
Flat 10% rate is not applicable here.
Dear Mr Batra,
Great article, I found this very useful. I have some queries for my personal case:
I purchased a plot in 2006 for Rs 10,00,000 and sold it for Rs 57,00,000 in 2011. I then used the money to make full down-payment for a new construction in the same month, with a builder and all the money from plot sale was used up (total down-payment Rs 59,00,000). Also, I purchased new property jointly with my son and daughter in law.
1/ The new property is under construction and possession will probably take more than 3 years. Am I still exempt under section 54C?
2/ If I sell the new flat after lets say 4 year for the same price as paid (59,00,000).. Will I owe any taxes ? Just want to make sure that old history is not carried to new sales after three years?
3/ Does including my Son in the new property has any more complication on taxes?
@Govind Singh
1. As per section 54F, If you are getting new house constructed yourself (you owned plot and getting house constructed on same), then construction should complete before three years of sale of old plot. If you are buying a constructed house, then possession of same must be taken within two years. If this is not done, you will have to pay income tax on capital gains.
2. If benefit is taken under section 54F, you cannot sell new property for next three years, else old benefit would also become invalid.
3. If other persons are also included in new property ownership, then tax benefit would only be applicable on value of your share in new property. Say if value of your share in new property is 20 lakh, you would need to pay income tax on remaining unused sale consideration proportionally.
Dear Pankaj,
Thanks for you reply.. the house I am buying is with a builder (in a township so I dont own the land). I don't have any direct influence over construction or possesion..however I make the complete downpayment... So does this mean that I am liable for full taxes if the possession is beyond 3 years?
Thanks Much
Govind singh
@Govind
As you are buying a apartment/flat, you need to get possession of same within two years from date of old property sale.
Even if you have paid full payments but not received possession and property is not registered in your name, then there won't be any income tax benefit.
Dear Pankaj,
I have purchased a flat in 1992 for 4 lakhs and sold it in May 2011 for 16 lacs.
Wanted to know what should I do to save the Capital gain tax?
How much would be the taxable amount and how much I have to invest in order to save the long term capital gain.
Don't have the capacity to invest in property again.
Please advice
Regards
Kamlesh
8108-02-94-03
@Kamlesh
Please see computation below:
Purchase Year = 1992-93, Purchase Cost = 400000, Cost Inflation Index (CII) for purchase year = 223
Sale Year = 2011-12, Selling price = 1600000, CII for sale year = 785
Indexed Purchase price = 400000 x (785/223) = 1408072
Long term capital gain = 1600000 - 1408072 = 191928
Income tax on capital gain = 191928 x 20% = 38385.6
If you buy a new residential house property for cost more than 1.92 lakh, or invest 1.92 lakh into capital gain bonds, there won't be any income tax payable.
Dear Pankaj,
Thanks for the reply.
So My capital gain in 1.92lakhs and on that I have to pay 38385 as Income tax at 20% correct?
So what are the options I have to invest.
I have searched some capital gain tax saving bonds but I am not sure if they are the right ones or not.
Please let me know some of the bonds?
Again within how many days I have to invest in order to save the tax?
Regards
Kamlesh
@Kamlesh
Capital gains is 1.92 lakh and if you decide to pay taxes, it will be 20% of long term gains, which will be around Rs 38385.
If you want to save this tax, you can invest 1.92 lakh into Capital gain bonds u/s 54EC.
NHAI and REC issue such bonds and investment needs to be done within six months from sale.
You can check details about such bonds here: http://www.nhai.org/bonds1.html and http://recindia.nic.in/54ec.html
As you sold property in May 2011, six months are already over so you may not be able to get tax benefit u/s 54EC by buying capital gain bonds.
Hi Pankaj,
I have one specific query.
I have sold my company shares (ESPP) for amount 10 lacs and having long term capital gain of 5 lacs.
Now in order to save capital gain tax I want to invest this amount in construction of house on a plot which I bought on march 2009.
What I understand from the rules is that I need to invest whole 10 lacs to save tax on the capital gain.
Now my question is that how can I prove that I have invested 10 lacs in the construction of house, I mean what documents I need to preserve as a proof that I have invested 10 lacs in the construction of the house.
Kindly advice into the matter.
Thanks
Yours Sincerely
Sujeet.
@Sujeet
You can have payment receipts from builder, material supplier, architect, carpenter, plumber etc. to show construction expenses.
Dear Pankaj,
After going through the figures on how to calculate the tax. I have figured that my Long term capital gain is : 10,63,322.
I have made the sale agreement on 9th May 2011 and received the cheque payment on June 1st 2011.
Now Please let me know what are the options I have in order to save the tax.
I can invest in new residential property, how much time I have and where I can keep this capital gain money before I finalize the new property.
Regards
Kamlesh
@Kamlesh
There are two ways to save income tax on long term gains. a. investing into residential property u/s 54/54F b. investing into capital gain bonds u/s 54EC.
As six months have already passed, you are not eligible for section 54EC now.
Now only option left is to buy/construct a residential house property. If you buy a constructed property, you have two years from date of sale. Possession of new property must be taken before June 1st, 2013. If you decide to get a house constructed yourself, then it should be done before three years, June 1st, 2014.
If new property is not bought/constructed before last date of income tax return filing date (31st July 2012), the gains have to be invested into capital gain account scheme. Payments towards new purchase should be done from this account.
Respected Sir,Sadar Namaskar 1. I have purchased a plot in the year 1981 at the cost of Rs 2250/-& paid Rs 1890/- as conversion charge from agriculture land to residential plot.later on deposited a sum of Rs 7650/- as development charge to Jaipur Development Authority.This plot I sold out on 23.08.2006 at the cost of Rs 12.5 Lac.Total amount Rs 12.5 lac I have deposited in Capital gain A/C in the SBI, later on I have purchased a house on 29.02.2008 at the total cost Rs 32 lac + stamp duty charge Rs 3 lac one hundred only in the three parties. My part 12/32, My son part 10/32 and My daughter in low (My sons wife) part 10/32).As I have invested full value of sold out this Jaipur plot hence not paid any LTCG. Was there any income tax to be paid? Kindly clarify 2. On 07.04.1999In Ghaziabad I have purchased a plot (In joint name with my wife while t o purchased this plot total cost paid by me) at the cost of Rs 5.5 lac (While the market value of this plot was Rs 6,60,000/= + stamp duty of Rs 66 000/- and court fees of Rs 10200/-, Now if this plot can be sold of Rs 1 cr then how much LTCG will be? , Can we purchase a ready built house in Noida to save the LTCG without dispose of 10/32 part of house in Ghaziabad ? Kindly guide me. I will be highly oblige please.
@R P Gupta
As you already invested sale consideration amount into new house, there won't be income tax payable u/s 54F.
But there are some conditions for 54F applicability.
1. Possession of new property must be taken within two years from sale of old property.
2. You should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
3. Total owned residential houses should not be more than two in next three years (till 29.02.2011)
4. New property should not be sold before next three years (till 29.02.2011).
If you sell your Ghazibad plot, LTCG would be around 89 lacs. You can purchase a built up house to save LTCG w/o selling existing house if as of now you own only one residential house property and all above four conditions are also met.
Dear Mr Pankaj,
I have sold a piece of land for 1.2 Crore in 2011. The same was bought for 20 lacs in 2004. The same is held in joint name in my wife and my name with almost 50/50 share. Apart from this I also hold one flat again in joint name with my wife and have also booked another flat again in joint name with my wife in April 2011 which is under construction and possession expected in 2014. The sales proceed of land sold, I am investing in buying a house property which will be more than 1.2 Crore.
Question is whether we can claim the benifit under section 54F. We have already one property under possession and one under construction but both are in joint names. What is the remedy available to save on capital gain from sale of land?
@P Kumar
As you both already own one property and another is also under construction. You will have two residential property ownership within next three years. So as per section 54F, you won't be eligible for tax benefit.
In order to save income tax on LTCG on plot sale now you can use section 54EC. You both can invest 60 lakh into capital gain bonds to save tax fully. But this investment has to be done within six months of sale and maximum 50 lakh can be invested in a financial year.