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 understand that if the actual amount of capital gain is invested in certain bonds,special deposit schemes of bank, the entire capital gain,after lock period of 5 years, can be saved in full except that interest earned,is taxable. I wish to know whether this is correct and if so,what are options available for investment,at this point of time
Mythili
@Mythili
In case of long term gain, you can invest the amount again in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India or National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Income tax on long term capital gains is 20% with indexation.
Hi, Just a related question. I had 19 Lakhs capital again in 2009 and I have already invested in Rural Electrificstion bond (Fixed for 3 years) on Mar 2010. Now if i buy a property this year (2010 Dec or 2011 Jan), Will I exempt from Tax that will be levied on the interest that I earned from Rural Electrication Bond?
@Deepa
No, As you already must declared tax exemption from REC investment, buying a house won't affect the tax implications.
I purchased a flat in Feb,2008 near Chennai after availing SBI Housing loan of Rs.37 Lakhs for a flat of Rs.40 Lakhs. As the EMI is very high and income does not allow to relay such huge EMI and I intend to sell it out and I have to repay Rs.35 Lakhs for getting the original documents from Bank. If I sell for around Rs.45 Lakhs, do I come under Capital gains and may have to pay Capital Gains Tax< If so how much? For reduced EMI I am planning invest some from the sale proceeds and bridging gap with loan from Bank Please advise me. Present age is 35
@Mahalingam
Capital gains = selling price - (cost price*(cost inflation index for selling year/cost inflation index for selling year)) = 4500000 - (4000000*(711/551))= -661524
So in your case, there is no capital gains, but actually its a loss as per above calculations. So there will be no income tax payable.
Pankaj,
I have started a company in 2006 (PVT LTD), and have sold it in 2010. My cost of acquisition is minimal, so indexation doesn't make sense.
Please let me know if I can be taxed at 10% (without indexation) on the sum received after selling the company.
Thanks,
Shekhar
@Shekhar
Unfortunately I don't have much idea about taxation rules for M&A.
I would request you to please consult any tax professional.
Sir,
I have sold my ancestor property on08/11/2010 @ 1200000/-. The property paartioned on 1993. at the time of value Rs.100000/- after partioned, I have demolished and constructed 900 SQ feet on my portion at the cost of 250000/- .the property price at the time of 1980 Rs.75000/-. please guide me capital gain tax and tax exemption ways.
Thanking you,
Yours,
S.Rajasekaran.
@Rajasekaran
Since house has been kept for more than three year, its long term capital gain. Income tax on long term capital gains is 20% with indexation.
Indexed purchase price, A = 75000*(CII for 2010-11 / CII for 1980) = 75000*(711/100) = 533250
Indexed construction cost, B = 250000*(CII for 2010-11 / CII for 1993) = 250000*(711/244) = 728483
Total indexed cost (Assuming in partition, you got half of the area, please adjust accordingly if different), C = (A/2) +B = 266625+728483=995108
Selling price, D = 1200000
Capital Gain, E = D-B = 204892
Income Tax, T = E * 20% = 40978
Note: CII stands for Cost Inflation Index here
To save income tax on this long term gain, you can invest the amount again in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
I must congratulate you for helping people out with their queries.
My case : I will be selling a residential plot which was bought in 2004 in Jan 2011. I will be making long term capital gain on this property. I want to repay my housing loan for my residential flat which is due for registration in Feb-Mar 2011 since the construction is ongoing. The sale agreement was done in Jan'2008. Can I claim exemption under section 54F ? This flat for which I want to repay the loan is my 2nd residential flat. Thanks
@AmitS
Under section 54F, The person can hold only one house property other than the new exempted asset, otherwise he cannot claim exemption u/s 54F.
As you already own another residential flat (other than the new one you are buying), you won't be able to get benefit of section 54F.
Dear Pankaj, thanks for your response, however I have a different understanding. For simplicity lets say the plot is "P", already owned flat F-old and new flat F-new. F-new is not registered yet. Lets say I sell P on 15th Jan. On that day I own only one house property i.e. F-old, so I should get he benefit. With this money I will pay the loan of F-new. Is anything wrong with my understanding ? Is there any other way for me to save the LTCG ?
@Amit
As per section 54F, In order to save capital gain earned from selling plot P, you will have to purchase a new residential property (1 year before transfer or 2 years after transfer) or get a residential house constructed within 3 years from the date of transfer. Plus new investment (cost of F-new) should be equal or greater than the amount of Net consideration (selling price of plot P). Also the person can hold only one house property other than the new exempted asset at time of buying new exempted property.
So, from your explanation, it looks clear that you will be owner of only one another residential property(F-old) at time of buying new one (F-new), so exemption will be applicable and you will able to save huge income tax arising due to capital gains.
But also make sure that you don't buy any other new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset (F-new).
Sorry for the earlier confusion!
Thanks a ton :) Big relief.
Now my only worry is that the sale agreement of F-new was done in Jan 2008. The house loan for F-new was taken at the same time. The registration will happen in Feb 2011. My assumption is that the registration date will be considered as the house property purchase date. If sale agreement date is considered then it does not qualify because 1 year is already over. Is my assumption correct.
@Amit
Unfortunately income tax law is not clear on this.
There are however reverse cases as well in court, in which payment date have also been accepted as acquisition date, even if possession was done later.
But I could not find any clear reference which says it has to be possession date or payment date.
I would advise you to consult a senior tax expert regarding this, as there is as ambiguity.
hi pankaj im in need of help regarding sale of house property(hp)
i currently have 2 hp of which one is rented out. i plan to sell the rented out hp and buy 2 houses with the amount i recieve. will i get tax benefit on both of the newly purchased hp or only on the one with greater amount??
also what will be the LTCG charged on the same if there is no bnenefit.??. i do not want to invest in the bonds as the interest given is too low? kindly provide some soluttion to save the same..thx.
@Sandeep
If you have kept the house for more than three year, it will be considered as long term capital gain (LCTG).
As per income tax rules, you will have to buy another residential house within 2 years of sale of old house with more or equal value as capital gain, in order to save income tax on LCTG.
You will have to compute capital gains with indexation first. Income tax on long term capital gains is 20% with indexation.
Purchase price = X, purchase year = P, sale price = Y, sale year = Q
Cost Inflation Index (CII) for year P= R, Cost Inflation Index (CII) for year Q= S
Indexed purchase price, A = X * (S/R)
Capital Gain, C = Y-A
Tax with indexation, T = C * 20%
So your new purchase must be more than or equal to capital gain C computed above, in order to fully save income tax. You can only get benefit for one new house property.
In case of long term gain, you can invest the amount again in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Dear Pankaj ,
I have a peculiar situation . I own a piece of land in my name. I have a house jointly owned along with my wife . I am the legal heir of another property but there are two more legal heirs . This last property is still not registered in the legal heirs names and division has also not happened .It was in the name of my father .
If I sell the plot of land and reinvest the money in a property can I claim exemption?
If not what else I can do to avoid/reduce tax liability . All properties are longterm owned.
Thanks in advance for your views .
M S Balasubramanian
@M S Balasubramanian
Since you are selling a piece of land, if you want to avail tax exemption, section 54F will apply.
As per section 54F, In order to save capital gain earned from selling plot, you will have to purchase a new residential property (1 year before transfer or 2 years after transfer) or get a residential house constructed within 3 years from the date of transfer. Plus new investment should be equal or greater than the amount of Net consideration (selling price of plot). Also the person can hold only one house property other than the new exempted asset at time of buying new exempted property. Also any other new house property cannot be bought within 1 year from the date of transfer or constructed from 3 years from date of transfer other than the exempted asset.
As of now, you are already a owner of one another residential property (jointly owned along with your wife), so exemption will be applicable and you will able to save income tax arising due to capital gains.
But as you are also a legal heir of another house, there will be issue when a part of that house is also registered in your name. As soon as that is done, you won't be able to get exemption under 54F, as thats makes more than one house in your name. Another thing, which can be done is get property share registered in name of your wife or sell you share before selling the plot (capital gains will be applicable here too).
Hi Dear Pankaj,
I have recently sold a plot. Could you please let us know, if we can avail tax exemption by investing part amount in buying Capital Gain/Infrastructure bonds and rest in buying a plot/flat?
Thanks
@Himali
First, I am assuming the plot was sold after 3 years of buying.
As you have sold residential plot, section 54F will be applicable for tax saving.
As per section 54F, In order to save capital gain earned from selling plot, you will have to purchase a new residential property (1 year before transfer or 2 years after transfer) or get a residential house constructed within 3 years from the date of transfer. Plus new investment should be equal or greater than the amount of Net consideration (selling price of plot). Also the person can hold only one house property other than the new exempted asset at time of buying new exempted property.
But also make sure that you don’t buy any other new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset.
Also under Sec 54EC, you can save capital gains tax by investing in certain bonds but only if the gains are invested within six months of sale of the capital asset in bonds like National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC). But this has a ceiling of up to Rs 50 lakh per financial year. You can do a trick to make it one crore by investing in two different financial years, if capital sale has been near end of financial year.
Yes you can invest in both capital gain bonds and buying a flat but there are not very clear rules on how taxation will be done in that case.
hi pankaj, thanks for your reply. however im confused as to whether section 54F which states that " one cannot claim deduction if you own more than one house at the time of sale of the asset"...since i own 2 hp.
also apart from long term capital gain with indexation @20% is the rate 10% without indexation?
also just wantd to know purchase price for calcualtion includes land+construction+stamp duty etc?? or is it only some componenets.
Regards Sandeep.
@Sandeep
In your case section 54 will apply and you don't have to worry about 54F, which is applicable on applicable on other long term capital gains (sale of plot, shares, bonds, jewelery etc.)
On long term capital gain from sale of house property, only 20% with indexation is applicable, the other method of computation (10% flat) is only available to mutual funds and bonds etc.
Yes, purchase price includes all cost incurred (land, construction, stamp duty).
Dear Pankaj,
I own an apartment in gurgaon and wants to sell it .I am confused about Long term capital gain calculation. My situation is I took possesion of the property in March 2008 but builder got it registered in july , 2008 . So which date will be used for 3 years holding calculation . Is it Date of Possesion or Date of Registeration.
Thanks a Lot!!
@Satish
You can use date of possession.
If the payment has been done and possession has been taken, possession date can be used as date of transfer of asset.
Hii Pankaj,
I own 4 flats in Pune all bought in 2006-2007. I wish to sale one of them and buy a new one within a year. Will I have to Pay LTCG.
Thanks & Regards
Jay
@Jay
In case you sell one flat and buy/construct new residential house, income tax can be saved on capital gain amount under Section 54.
New house should be bought between time period of one year before selling and 2 years after selling old property.
Or a new house should be constructed within 3 years of selling older one.