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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  • I had sold a property which got transferred to my name after my father's death ( after consent from my mother / sister). Now I intend to add some more amount and buy a property with the amount I received. However, I want to know if I can buy that property in the name of my mother and/or sister, without my name in it. Will it cause any tax issue, if my name is not included on purchase of the new property?

    • @Suhas
      As you sold old property, you are liable to pay income tax on it. You can save this tax if you purchase another residential house property in your name only.
      if new property is bought on you mother/sister's name, there won't be any tax exemption on long term gain tax.

      • In that case Is it possible to save tax by having the new property on the name of all three of us,i.e., my mother/ my sister and mine?

        • @Suahas
          Yes, tax can be saved even if property can jointly owned.
          But only cost of your share in new property would be considered for exemption.

  • I have a property which I purchase on 2004 for 27lacs and am now selling it for 114 lakhs. What will be a tax implication. I am going to invest in a new flat for 80 lakhs where I am taking aloan for 45 lakhs, can I invest in two properties and will I avoid tax completely by doing so.

    • @Subashri
      There is long term gains of around 70 lakh in your case. This gain is taxable at rate of 20%.
      If the property being sold is a residential house property, you can save income tax fully if you buy a new residential house property for cost more than 70 lakh. Tax benefit can be taken only against a single residential house property. If you buy more than one, you would only be able to show one for tax benefit.

  • sir we have ancestor agriculture land and sold in FY 2011-12 amounting to rs 85.00 lacs. we have no purchase cost. please advise what cost we take for indexation.

  • Please tell me which of the following two options can be used to save capital gain tax. If one sells gold Jewellery and say gets Rs 10 Lakh. To save a LTCG tax on the sale of gold jwellery:
    1) Can it be used to pay an outstanding Home Loan of Rs 8 Lakh and just pay capital gain tax on remaining 2 lakhs?
    2) To buy capital bonds worth Rs 10 lakh?
    Note: don't want to invest in new residential property. In case 1) is allowed then would like to pay of the existing home loan.

    • @Satpal
      1. There is no tax benefit on paying home loan. But if possession of house is received within one year before and two years after sale of gold, then tax benefit can be taken u/s 54F.
      2. If capital gains bonds are bought within six months of sale, tax benefit can be taken u/s 54EC.

      • Thanks Pankaj. The house for which I'm paying home loan is still under construction. So if I pay my home loan by selling the gold and then within the next two years will get the possession, then I don't have to pay any tax on the LTCG for the amount I used to payoff my home loan?

        • @Satpal
          If possession of new house is received within two years from date of gold sale, income tax on gains can be saved u/s 54F.
          But you would need to deposit sale consideration of gold into capital gain account scheme before last date of income tax return filing for year in which gold was sold.
          However there are below conditions for section 54F applicability:
          1. You should not be owning more than two residential house(flat/house/apartment) at the time of selling gold.
          2. If total residential houses owned by you becomes two (including new house), 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 house should not be sold before next three years.

  • Hi pankaj,

    My father sold ansistors property, and gave it to me my brother and sister. I got 25lakhs as my share. Do i need to pay tax for it?? Does this money comes under capital gain?? please suggest..

    • @Geetha
      If your father sold property, he would need to pay income tax on capital gains.
      There is no tax liability on your side as you received money as gift from your father and not by selling property.

  • Hey Hi Pankaj,

    Wanted to know that if a land I bought in 1998 for 1lakh and now sold for 15lakhs, how can you save or not pay capital gain. Any kind off investment or any kind I can???

    • @Arka
      Either you can buy a residential house property u/s 54F or invest into capital gain bonds u/s 54EC to save income tax.

  • Hi Pankaj
    I live in Austraila. I have OCI n sold a plot in India. I have few questions regarding saving capital gain tax.
    If we book an apartment with the builder with the capital gain money today & get possession in two years. when can we sell it? is there any minimum holding period of the property before resale?
    When from the date will be counted from the date of booking or possession?
    If we buy a ready house with capital gain money , are we allowed to rent it. can we take the rental proceeds out of india after paying tax.
    Thanks & Regards

    Meena

    • Hi Pankaj
      one more question please.
      If i book a villa with a builder today for which the possesion date in the contract is just under 3 years. if the actual posession gets delayed from the builder. will i be still qualified for the capital gain tax exemption under sec 54 F.
      Thanks n regards.
      Meena

      • @Meena
        You won't be able to claim tax benefit u/s 54F if you don't get possession of house within two years of sale.
        This duration is three years if you are getting house constructed yourself by purchasing land first.

    • @Meena
      New property purchased to save tax should not be sold for three years from purchase.
      Three years would be counted from date of possession..
      If you buy a ready to move house, you can give it on rent. After paying tax on income from house property, you can transfer it to outside India too.

  • Dear Pankaj Sir,

    I have bought my current flat where I am staying for 23 Lakhs 6 years back on a loan of 20 lakh and the current value of the flat is 40 lakhs. Now planning to buy another flat for 50 Lakhs with 40 lakhs loan which is under construction and builder is likely to handover in Jan-2014. Once I get possession of new flat, I am planning to sell the other flat and clear loan for this new flat. Whether I will be coming under capital gain exemption for this particular transaction? Or else how can I save from capital gain.
    Thanks
    Suneel

    • @Suneel
      If possession of new flat is within one year before and two years after sale of old flat, then you can claim tax benefit u/s 54.
      Also, If cost of new house is more than capital gains earned from old one, there won't be any income tax payable on gains.

  • Dear Pankaj sir,

    I request your help and guidance to resolve confusion and complications in my tax related issue.

    I have sold one of my residential house property on 26th June 2009 (registration date).

    LTCG is 10.71 lacs. Amount lying in capital gain scheme account.

    Now as per IT act I have to purchase another residential house within 2 years or to construct within 3 years.

    As already seen from above 2 years are passed from date of transfer and I wasn't able to buy property. Now I am left with only option of construction.

    What should I do out of 3 options:

    1. I have booked 1 under construction flat (date of booking 7th jul 2011), paid 4.5 lacs out of capital gain scheme, but it will not be able to complete by 25th June 2012 (3 yrs from date of transfer).
    If i pay full amount of capital gain before 25th june 2012 to builder, Does IT dept. will consider it as investment under section 54.

    Or 

    2. Should i buy a readymade complete house and spend some amount on further construction. Does IT dept. will consider it as investment under section 54.

    3.Is mere purchasing a new complete house after 2 yrs but before 3 years can be considered as investment under section 54. I.e time limit of buying a house can be extended beyond 2 yrs.

    Request your valuable advice.

    • @Aashish
      1. Under construction flat from a builder does not fit into construction rule. You would need to buy land and get house constructed yourself for three years period benefit.
      2. If you buy a ready to move house and get it reconstructed, it may save you u/s 54.
      3. Time limit for a buying a ready to more/built-up house cannot be extended beyond two years.

      • Dear Pankaj,

        For reply in point no.1, circular no. 471 of Income Tax clarifies that construction will cover under construction flat also, if I invest my whole of capital gain before end of three years irrespective of completion.
        Can you throw some light on it ?

  • i have agreement for sale(for sale of my old flat) in nov,11 and i have already purchased a flat in may 2010 in an under construction building for which i got the possession only in nov 2011 ,the value of the old property which i sold is 287500 as on 12/04/1994 and sale amt received is 48,00,000/- and the price of new property is 62,00,000/- and property is jointly held by spouse
    kindly advice and thank

    • @Darshana
      Assuming that you and your spouse own equal in new property, cost of your share in new property would be 31 lakh.
      As this cost is more than gains from sale of old property and you are getting possession of new property within time frame (one year before and two years after sale), you won't need to pay income tax on long term gains u/s 54.

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