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:
- 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.
- 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:
- If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.
- 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
- 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.
I have deposited 20Lacs on Fixed Deposit under Capital Gain on June 2011 and now want to invest the complete amount in a residential property. Please advice what are the formalities required to withdraw the money. How the payment to be used?
@Vikas
First capital gain fixed deposit account will have to be converted into a capital gain savings account. After this is done, You can withdraw amount by filing up form C and D. Amount withdrawn can only be used to pay towards new house purchase or construction. Withdrawn amount has to be spent within sixty days and whatever is left has to be deposited back within this time.
To close this account you would need approval from assessing officer in form G.
Hi Pankaj,
Thanks for your valuable advice. Do I have to get any approval for form C and D
Regards
Vikas
Pankaj,
just to add in the previous query, can I use 60% of the amount of Capital Gain FD to support purchasing of land. Balance 40% amt I can use for construction in Nov 2011.
Regards
@Vikas
No approval is needed in case of form C and D. But any withdrawal over Rs.25,000/- will be done only in form of crossed demand draft (can be payable to builder or seller)
Yes, you can use some amount in buying land and rest for construction. Take out 60% amount first with DD payable to land seller.
If I sell 2 houses and purchase 2 house will I get LTCG benifit on both of them or either of them and what will happen after DTC
@Nilendra
If you sell two house and purchase two new houses, you can claim income tax benefit for both individually under section 54.
Even after direct tax code, this will remain as it is, as per current draft.
Dear Sir, From the sale proceeds of two apartments in a building, I expect to earn about 25 lacs as LTCG (rupees ten lacs from one apartment and another 15 lacs from the other). . I want to buy two number apartmens from thesale proceeds. Apartments are to be sold out on two different dates to two different buyers. Will I get LTCG Tax exemptions on the two new apartments, I am going to purchase. The sale is within the same assessment/financial year. Please do reply,
@A.L.Gera
You can get tax benefit under section 54, as you are buying new flats from the sale amount of old flats.
To save tax fully, new flat’s cost should be more than capital gains earned from older one’s.
my father sold house for 45 lacs . LTCG is 15 laCS. HOW MUCH MONE IS TO BE INVESTED IN CAPITAL GAINS ACCOUNT SCHEME – 45 LACS SALE PROCEEDS OR 15 LACS lTCG ? Also , how much period to be invested ?
thanks.
heena
@Heena
In case of sale of house, only capital gains has to be invested into capital gains scheme account. Amount can be maximum invested in this account for three years.
To save income tax fully, within two years of sale of old house, a new house has to be bought for amount more than LTCG (15 lacs), or a new house has to be constructed within three years.
If same is not done, income tax will have to be paid @ 20% on LTCG, after that only amount can be withdrawn from capital gains scheme account.
Thanks for your reply. also, where can we invest the rest of 30 lacs ? If we invest in bank , is the interest earned on it taxable ? My father has invested 42 lacs in capital gains scheme instead of 15 lacs for a period of 400 days . now what do we do in this case ?
@Heena
You can invest rest 30 lacs wherever you want. if you put it in bank, interest will be taxable as usual.
Your father can withdraw remaining extra amount from capital gain account by providing approval letter from assessing officer.
Hi Pankaj,
Can you advise if I invest the money from sale of my flat in a Capital Gain savings account, does the interest earned on this amount also be used for buying a property itself?
@Manoj
If new property is not purchased before income tax return filing last date (31st July) but you intend to do so in next 2 years, then its mandatory to invest the capital gains into capital gains scheme account. If its not done, income tax would be payable on capital gains.
Interest earned on capital gain account will be added to taxable income and taxed as per your slab rates.
Sir,
I got around 5Laks LTCG from my house sale in July2011.
I purchases new flat in 2009 October (Registration) and got possession in April 2011.
Can account the LTCG from my house sale in the in my new house?
@Shanthi
Yes, you can do same as you got possession of new house within one year before sale of old flat.
Respected Batraji. Please ponder over my question. I bought 200 sq yds semiconstructed plot in 1984.Most of the semiconstructed house remained unutilized as my husband was in service.Ater retirement I got it constructed from a builder which contained Parking on GF, Uppeer Ground Floor, First Floor and Second Floor.One complete floor was given to builder without consideration. I am occupying UGF as residence. Now I want to sell out Complete Second Floor (which contains two apartments) for a consideration and my long term capital gain would be approx. 32 lacs.Can I utilize the full amount of long term capital gain for purchase of two houses under construction in Kundly area .The approximate cost of two houses will be arround 80 lacs, The new houses i want to buy are under construction and I may get possession within three years as the builder is promising. I am still to book the houses. I have one residential unti on UGF. Am I entitled to claim LTCG for the purchase of two houses from the builder. I am an old lady and am not in a position to seek advice from other legal sourses. Please advise,
@Savitri
Under section 54, income tax benefit is available against purchase of a single property only. To save tax fully, new house property cost should be more than long term gains only (32 lacs).
In case you are selling two apartments as separate units, you may buy two residential properties in return to save tax.
Possession of new properties must be taken before end of two years from date of sale of old flats. Whole long term gains should be invested into capital gain account scheme till this period.
Batraji-
Thanks for timely reply. I already own a house in the old complex. Will I get tax benefits under such conditions.The builder of new house , which I want to purchase the two number apartments, will give me possession within three years. If possession is delayed beyond two years, will I get the tax benefit?. The builder after booking the apartment is ready to give me provisional allotment letter. Will this allotment letter can be termed as possession of new house. Please reply .Thanks in anticipation.
@Savitri Ji
Already owning a house anywhere won’t be an issue in claiming tax benefit under section 54.
If possession of new houses is not taken in next two years, income tax benefit won’t be applicable.
Provisional allotment letter won’t be helpful, Only a registration of property in your name and possession letter will help.
Sir
I bought a site in 2003 for 29L and it lay vacant till 2011. In the meanwhile I built a house with loans from two banks. I am planning to sell the vacant plot for about 85L. The indexed cost of the site in 2011 is coming to 51L. So the Capital Gains is 34L. Can I use this money to pre-pay my existing home loans and save the capital gains tax? Or is it that the money has to be spent only on buying/constructing a new house?
@Chandra
If a new house has been bought/constructed within one year before sale or within two years (three years in case of construction) after sale of old plot, then only income tax benefit will be applicable under section 54F.
Also, to save tax fully on gains earned from plot sale, whole sale consideration amount (85L) has to be use (not only the capital gains amount – 34L). In case less amount is used, income tax benefit would be available only for proportionate amount.
Dear Mr.Pankaj,
I was given some shares from my employer a company a joint venture between 02 organisations and closly held in year 2007 @ Rs.17/- per share. Now One partner has sold its share in the co. to the another and we have transfered our share by off market transcation to a employee welfare trust which also held some equity in the organisation.
Now this trust has paid us the money and they in turn will sell this to the other equity holder who is taking control.
The shares has been sold @ Rs.60/- per share and from proceeds they have deducted the interest on issue price and the issue price also which we did not pay at the time of issue and paid us @ Rs.35/- per share and (60-17(Issue price)-Rs 8
( Interest for 4 years)
kindly guide if we need to pay any tax on this transaction and if yes how much.
Regards
Deepak jain
@Deepak
I think it will be treated as short term gains and whole income (Rs 35 x no of stocks) will be added to your taxable income and taxed as per your slab rates. This is because you never actually bought these unlisted stocks.
If you would have paid for same in 2007, then it would have been long term gains (as kept for more than three years). In that case income tax applicable would be 20% on gains with indexation benefits. Below calculation would have been used in that case:
Purchase Year = 2007-08, Purchase Cost = 17, Cost Inflation Index (CII) for purchase year = 551
Sale Year = 2011-12, Selling price = 60-8=52, CII for sale year = 785
Indexed Purchase price = 17 x (785/551) = 24
Long term capital gain = 52 – 24 = 28
Income tax on capital gain = 28 x 20% = 5.6 Rs per stock
Thaks Pankaj for your prompt guidence, since i am paying the interest on borrowed capital for buying the shares will it not tentamount to have been purchased by me in 2007.
Second, what is the difference betwwen STT paid and Not paid, does it impact the tax liability?
@Deepak
In case of capital gains, three years are counted from transfer of capital assets to your name, which did not happen in 2007.
For all Indian listed stocks (on stock market like NSE, BSE etc) and equity mutual funds, gains earned from more than one year of investment are tax free. On all these transactions STT is paid, so as a general rule, if STT has been paid on transaction, long term gains are tax free.
Dear respected Batraji
Please advise-
1. My expected amount of LTCG (on sale or residential house) as on 10-10=2011 = Rs.2730000.00
2. Intend to book residential apartment on 12-10-2011 with cost = Rs. 3570000.00
3. Pay 10 % booking amount to builder on 12-10-2011 =Rs. 357000.00
4. Pay 85% as down payment plus EDC/IDC/PLC/Car parking amount on 27-11-2011=Rs.3384500.00
5. Sign agreement and get allotment letter on 27-11-2011, specific apartment is allotted
6. Thus total amount paid by me ending 31-12-2011 will be Rs. 357000.00(booking amount)+3384500.00 (85%+other chages =Rs. 3741500.00
7. (This total amount of 3741500 is made from the amount of LTCG amount and my savings etc)
8. Thus be end of FY 2011-12(AY-2012-13) I will be paying more than the amount of LTCG amount which is 2730000.00 . I am to pay balance 5% at the time of offer of possession to builder.
My request is please clarify-
• Where to keep the amount I received from the purchaser of my old house which I receive on 10-10-2011.
• Am I required to open LTCG account with the bank on 10-10-2011 or so
• If I do not get promised possession of the new apartment under purchase within Two years what will be my liability.
@Chawla Savi
There won’t be an issue if possession of house is taken before 31st July 2012. But if it is not done, as per rules, a capital gain scheme account (CGAS) needs to be opened.
To be on safe side, open an account in CGAS before 27-11-2011 and deposit deposit 27.3 lacs into this. On 27 nov, 2011, leave 5% amount in CGAS (to be paid at possession) and withdraw remaining amount as demand draft in Nov to pay towards 85% to builder.
If possession is not taken within two years of sale (by 09-10-2013), no income tax benefit would be available and income tax @ 20% would be payable on LTCG.
I sold 2 apartments in 2009 April and Capital Gains amount is deposited in a Bank to buy land and construct 1 house which is in process. Can I give a contract to a builder to buy land and construct a new house and use the full capital gains+ may be another 10 lacs over? Is this allowed?
Another question:
I sold 1 land in 2011 April. Can I buy another house using the capital gains or can I put the money in any bonds or any other instrument and save taxes?
please assist me.
Babu
@Babu
If you want to take three years duration, first plot must be bought in your name, after that you may contract construction to a builder.
If land is bought by builder and house is constructed and then sold to you, two years time-frame needs to be followed.
To save income tax on gains from newly sold land, you can again invest into a new house u/s 54F. But there is a condition that you should not be owning more than one residential house property at the time of buying new house. Plus total number of houses owned by you should not be more than two in next three years too.
Tax can also be saved by investing into capital gain bonds u/s 54EC. Max investment allowed is 50 lacs per financial year.
To save tax fully, whole sale consideration amount needs to be invested under 54F and 54EC. if less amount is invested, income tax would be chargeable proportionally.
Dear Pankaj
I had purchased land for about 2 lacs in 2005 and sold for 21 lacs in April 2011. I would like to take your advise and would like to invest in 54EC. What is the amount I should put in 54EC. What is the time frame to invest? 6 months or 1 year from the date of Sale?
@Babu
To save tax fully, you should invest 21 lacs within six months of sale into capital gain bonds u/s54EC.
Is it possible to sell flat and buy an office space with the proceeds thus by saving LTCG if the 5 year criteria is fulfilled?
@Manu
In case an office space is bought from sale proceeds received on flat sale, no tax benefit would be available. Hence 20% income tax would be payable on long term gains.
Dear Pankaj,
I bought an apartment in Bangalore from the builder in 2005. I paid the full amount for the apartment in 2005. The apartment only got constructed in 2011. I will be taking possession in 2011. If I sell in 2012, will it be a long term capital gain or short term capital gain.
Thanks
@Veekay
It will be short term capital gain, if you sell before completion of three years from date of transfer to your name (registration) or possession.
HI Pankaj
Appreciated , to give very quick and helpfully answer to us.
i have one question ,i have 2bhk flat in pune.
i am selling my own flat (2 years old) .my purchase cost is 25laks
and selling cost is 36laks. so how i save my short term capital gain?
please suggest me the process for other investment plan.
@Rahul
Income tax on short term capital gain cannot be saved.
Whole gains will be added to your taxable income and taxed as per your slab rates (max 30%).
Dear Mr. Pankaj Batra,
1] If the property is to be purchased within 6 months or before march is it necessary ot open capital gain account?
2] Is it possible to invest partially in bonds and partially in property?
3] Is it acceptabl;e to buy old property?
@PBJ
1. Its not mandatory to open capital gain account if new property is transferred in your name before income tax filing last date (31st July). So if property is sold between April, 2011-March, 2012 and new house is not registered in your name by 31st July, 2012, capital gain account needs to be opened.
2. Income tax laws are silent on simultaneous usage of section 54/54F (new house purchase) and 54EC (capital gain bonds). I would advice you to use both with caution and take advise of a tax professional/CA expert in property matters.
3. Yes, you can buy an old property (resale).
thanks pankaj,
means u suggest me, to purchase resale property in same financial year and save the short term capital gain.is it right?
@Rahu
I did not suggest you to purchase resale property, as no purchase will save you from income tax arising due to short term capital gains.
Looks like you are confused with an answer to other person’s(PBJ) query.
Shri Pankaji,
Thanks for the promt reply. I shall definatly consult my C.A. about Investment in 54/54F & 54EC Prabhakar Jagtap
I sold a property in April 2009, the capital gain amount which is 30 lacs, I put in 2 year FD with the scheme B with the Bank.
I have already signed an agreement for land to buy and complete a house in that land ( which is half built by the current owner). Should I finish the whole construction by April 2012 or can I stretch upto July 2012?
@Babu
In case of construction of house on your own land, you can stretch only upto three years from date of sale of old property, which ends in April 2012.
Is it a must that I should complete the registration of property in my name or just use the funds within 3 years ie before April 2012? I can pay to the contractor 30 lacs before April, but the house could be ready only may be in June or July. Is this allowed?
Another question:
Can I use the Capital Gains, as mentioned earlier 30 lacs and another Capital gains I made through land sale ( not house) in April 2011 and use the both the Long Term Capital Gains into 1 residential property? Is this allowed?
@Babu
Yes, its a mandatory condition that you complete registration of property and possession before end of three years.
It is allowed to use gains from two assets to buy/build a new residential property. Tax benefit can be taken against both the gains here.
But in case of land sale, section 54F will apply and you will have to follow its other conditions.
Respected Batraji
A brief clarification is solicited please.
(a) Is LTCG gain tax charged on the full amount of Gain or charged on the unutilized amount left in the LTCA with bank?
(b) Also the new apartment is being built with my money by the builder, am I entitled to three years time limit instead of two years for possession /registration purpose. Thanks
@Savi Chawla ji
1. Income tax would be charged on gain’s un-utilized amount left after purchase of new property.
2. If you also own the land of new house (i.e. there is also land/plot registration in your name) then you may take three year’s time limit.
I BOUGHT LAND FOR RS7LACS AND CONSTRUCTED 2000SQ/FEET IN 2005.NOW IF I SELL IT FOR 40 TO 50LACS HOW TO SAVE CAPITAL GAIN TAX. FOR CONSTN I SPENT RS20LACS.NOW I WANT TO SETTLE IN MY HOMETOWN. SO I WANT TO BUY HOUSE THERE. I WAS TOLD IF I SELL ABOVE 30LACS I HAVE TO PRODUCE INCOMETAX CLEARANCE CERTIFICATE TO REGISTER OFFICE.PLS ADVICE
@Malika
Indexed cost of your house in 2011-12 comes out to be around 42.6 lakh.
Purchase Year = 2005-06, Purchase Cost = 2700000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, CII for sale year = 785
Indexed Purchase price = 2700000 x (785/497) = 4264588
So if you sell it below this amount, there won’t be any capital gains and no income tax would be payable.
But if its sold above 42.6 lakh, differential amount would be capital gains.
Say if Selling price = 5000000, then Long term capital gain = 5000000 – 4264588 = 735412. Income tax on capital gain = 735412 x 20% = 147082.4
To avoid income tax on this gain, you can buy a new residential house property for value equal or more than this gain (7.36 lakh).
THANKS FOR UR PROMPT REPLY.ACTUALLY I PURCHASED LAND FOR Rs 7 LACS. REGISTRATION CHARGE WAS 80000. THEN I CONSTRUCTED 2000 SQ.FEET IN 2006.PLS CLARIFY. SUPPOSE IF I SELL FOR Rs 40 LACS . AND THEN IF I PUCHASE A LAND OR HOUSE FOR 20 LACS WHETHER I HAVE TO PAY TAX . FOR CONSTRUCTION WHAT PROOF I HAVE TO GIVE BECAUSE I DIDNOT HAD CONTRACTOR . I DID IT WITH DAILY WAGES WORKERS.
@Mallika
In case you sell it for 40 lacs and you can show house construction expense in any way like building material bills etc, there won’t be any capital gains and no income tax.
Sir
On Sep 26th I had asked a similar question. Original cost is 29L in 2003 and sold for 85 in 2011/2012. The indexed cost was 51L with a gain of 34L. As an answer to this you had indicated that the whole proceeds (85L) had to be re-invested in a new property and not just the gain (34L). Just a little confused on the answer above which says on the gains (about 7L) has to be invested. Can you please clarify on this?
@Chandra
Taxation is different in case of sale of a residential built up house property and any other capital assets.
In case of residential property, section 54 applies and to save tax fully, only long term gains part has to be re-invested.
But in case of all other capital assets (plot, commercial property, unlisted stocks, gold etc) section 54F applies, under which whole sale consideration has to be invested to save tax fully.