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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  • I am constructing a house in a plot that was bought before 5 years. now i am selling a land that was settled by my father before 2 months for 15 lacs. can i use this amount for construction. will i get tax exemption or i need to deposit money in bank for 3 years

    • @Kavitha
      You can get tax benefit for construction of house u/s 54F in your case.
      In cost of construction is more than than sale consideration of your share in land sold, there won't be any income tax payable.
      Construction should complete within three years of sale.
      If construction is not completed before 31st July 2013, you need to deposit unused amount into capital gain scheme account.

  • Hi Pankaj

    My mother has undivided share (residential) from her father, she plans to to sell the same. It is LTCG, can she buy two new residential houses one for me and other for my sister.

    • @Balaji
      Yes, its LTCG and income tax is payable @ 20% on long term gains computed with indexation benefit.
      She can save income tax on gains by buying/constructing residential house property u/s 54 or into capital gain bonds u/s 54EC.
      She would need to buy new property on her name only. If her son and daughter wants to buy houses, she should first gift property to them and they can sell and save income tax by investing into property.

  • The clarification I need is as follows:-

    1. I bought a house in 2006 largely through a bank loan.

    2. I sold the house in July 2011.

    3. Using the principle + capital gains + bank loan, I bought another house in Jan 2011. Using the T-1/T+2 rule, I was exempt from any tax on LTCG.

    4. Now I would like to sell this house in Jan 2013 and move to a smaller house to reduce my EMI burden.

    Given that the second house was not in my possession for 3 years (It was only for 2 years), would I need to pay tax based on short term CG

    OR

    Is there a rule, a way where the back to back transactions have a exemption of some kind or can be treated as LTCG ?

    • @Indrnil
      As you want to sell new property (against which exemption was take u/s 54), before three years, then for computing gains on this property, cost would be reduced by amount of capital gain exemption taken u/s 54.

      Short term gain = property selling price - (property buying price - capital gain exempted earlier u/s 54).

  • Property details:
    The ancestral property of the year 1920 has been passed on to my grandfather’s generation in the may 2012 and my father and his two brothers received it in the month of august 2012. My father and his two brothers got 270 sq yards of urban land each. Now I wish to purchase the land of 270sq yards from one of my uncle [dad’s brother]. The present government value of the property is 27k per sq yard and the market value of the property is 60k per sq yard. I heard that there would be nearly 20% to 30% of income tax on my uncle on his sale proceeds. So could you please clarify me the total income tax / capital gain that my uncle be liable to pay in detail. I would really appreciate your response. Please explain
    Kumar

    • @Kumar
      If your uncle sells house property to you, he would need to pay income tax on capital gains earned from the sale. Income tax would be payable @ 20% on gains with indexation benefit.

      Below is the method to compute long term gains and income tax. As property was inherited and it was purchased before 1981, purchase year would be assumed as 1981 and cost would be fair market value as in 1981. CII for 1981-82 was 100. CII for 2012-13 has not been announced yet.

      Purchase Year = A, Purchase Cost = P, Cost Inflation Index (CII) for purchase year = X
      Sale Year = B, Selling price = Q, CII for sale year = Y
      Indexed Purchase price = P x (Y/X) = R
      Long term capital gain = Q - R = S
      Income tax on capital gain = S x 20%

      One way to avoid income tax is to get land gifted to you by a gift deed without any consideration and in return you can gift an X amount to your uncle . There won't be any income tax payable on gift received from uncle and vice versa.
      One

  • dear mr batra, we have purchased one residential plot in 27.07.2005 in 500000 (en.boundry ex,transfer ex and brokrage) and now we sold in 8.8.2012 in 1110000 so what is tax calculation and if we invest in a resi plot amt 1500000 than what is the position of ltcg------plz tell me sir

    • @Raj
      Cost inflation index for 2012-13 has not been declared yet. In below calculations, it has been assumed as 850. Please change it once its announced.

      Purchase Year = 2005-06, Purchase Cost = 500000, Cost Inflation Index (CII) for purchase year = 497
      Sale Year = 2012-13, Selling price = 1110000, CII for sale year = 850
      Indexed Purchase price = 500000 x (850/497) = 855131
      Long term capital gain = 1110000 - 855131 = 254869
      Income tax on capital gain = 254869 x 20% = 50973.8

      There won't be any tax benefit on investment into a residential plot, but if you construct house on it then benefit can be taken u/s 54F.

  • Sir Good evening.
    It is quite appericiable that you answer all quaries with a lot of patience. Hats off to you !!!!.
    Sir, I had bought a flat in 13.00 lakhs in 2001. I sold the same at 37 lacs in 2006 incurring a LTCG of 24 lacs. I invested 30 lacs (including LTCG of 24 lacs ) in buying another flat in 2009 (within 3 yrs ). NOW i need to sell ,urgently , the latest flat in 2012 (not completed 3 yrs ) in 45 lacs. What will be the implication of STCG / LTCG on previous or new flat ? Kindly clarify. Regards and thanx.

    • @Rakesh
      First thing first, your LTCG in 2006 was not 24 lacs but around 21 lacs as per indexation benefits:
      Purchase Year = 2001-02, Purchase Cost = 1300000, Cost Inflation Index (CII) for purchase year = 426
      Sale Year = 2006-07, Selling price = 3700000, CII for sale year = 519
      Indexed Purchase price = 1300000 x (519/426) = 1583803
      Long term capital gain = 3700000 - 1583803 = 2116197

      Now in order to save income tax on this gain fully, you needed to invest atleast this 21.16 lakh into new residential house property. As you bought a flat, possession for same should have been taken within two years from sale as per section 54. So your assumption of tax benefit was not valid by buying a flat in 2009.

      Now as per section 54, in case new bought property is sold before end of three years, tax benefit becomes invalid. First it would be short term capital gain and second purchase price of this property would be reduced by tax benefit on long term gain taken.

      Short term gains in selling latest flat = 45 - (30 - 21.16) = 36 lakh.
      This whole amount would be added to your taxable income and taxed as per your slab rate.

  • I am senior citizen aged 60 years and have sold my ancestral URBAN agricultural land in October-2011 and have kept the amount in capital gains account. Now My wife who is also a senior citizen desires to sell her own ancestral RURAL agricultural land. Both the land holdings are Long term holdings. Now my question is, Can I save my LT Capital Gains Tax by purchasing the land owned by my wife? I wish to follow proper legal land registration formalities and give the sale amount through bank cheque. Is is legally correct proposition or not? Kindly Advice.

    • @Mohan
      As such, you can buy property from your wife. There should not be any issue in that.
      You can claim tax benefits u/s 54B.

  • hello sir
    How to Calculate STCG on Gold Coin Purchase value 116600 & Sale Value 131900, Purchase Dt : 21/06/11 & SD : 09/08/2011 and he deposited the sale amt to Residential Flat , how the Working will

    • @Kiran
      As gold is sold before end of three years from purchase, gains would be counted as short term capital gains.
      Short term capital gains = Sale price - purchase price.
      There is no tax benefit available in case of short term gains. Whole gains would be added to taxable income and taxed as per slab rates.

  • I have a joint flat in my name and one more in my name is under construction.

    Can the sale proceedings from land ( long term holding) be partially adjusted to avail of the tax benefit as the flat is still under construction.

    • @SCGupta
      If possession of under construction flat is taken within two years of land sale, you can take tax benefits u/s 54F.

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