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.
Thanks For advice
if i have to get money from selling a plot ,can i buy a argriculture land , will it save on my LTCG . if the cost of the land is more than what i have got from selling the plot ? i do not have any house on my name , can i bulit a farm house on the argriculture land i buy , will it save my income tax , as i plan to stay there eventually. thank you
@Archana
Buying an agricultural land won’t help you in saving income tax.
But if you convert it to residential plot and construct a house on it, benefit can be taken under section 54F. It has to be done within three years of old sale.
To save tax fully, new land + construction cost should be more than selling price of old plot.
Dear Pankaj,
I had bought a flat in 2005 @ Rs. 10.50 lacs with a housing loan of Rs. 8.25 lacs then. Now I plan to sell it at estimated market value of Rs. 45 Lacs.
Can I deduct principal outstanding of housing loan (Presently approx. Rs. 6.5 Lacs) against this property to arrive at the capital gains figure ? i.e. 45-10.5-6.5 = 32 Lacs.
I plan to re-invest the gains whatsoever to buy new property within a year to save on LTCG Tax. Please advise.
Thanks in advance.
Just a small correction in my above query i.e. 45-10.5-6.5 = 28 Lacs.
@Pramod
You cannot deduct outstanding principal amount from capital gains.
Below is the computation for LTCG:
Purchase Year = 2005-06, Purchase Cost = 1050000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 4500000, CII for sale year = 785
Indexed Purchase price = 1050000 x (785/497) = 1658451
Long term capital gain = 4500000 – 1658451 = 2841549
Income tax on capital gain = 2841549 x 20% = 568309.8
If you buy a new residential house property within two years of sale, for cost more than 28.5 lakh (LTCG), there won’t be any income tax payable u/s 54.
Dear Pankaj,
Thanks for your prompt and a satisfying reply for my query dtd. 4th Oct 2011.
Just need one clarification – So does that mean that I can invest the cost amount of property with inflation index (Rs. 16.58 Lacs) elsewhere? In that case, if I am buying another house of approx. 40 Lacs, I can make down payment of Rs. 28.41 Lacs to save on LTCG Tax & rest I can take a fresh home loan?
@Pramod
If you buy a new house for price more than 28.41 lakh, income tax on capital gains would be saved. It won’t matter if you take loan or not.
Dear Sir
My Amount as per AGREEMENT FOR SALE is say rupees X. And the amount of registration of property as per Circle Rates is Y. Here Y is less than X. Can I show the document “Agreement for sale ” for the purpose of LTCG. Is agreement for sale is legal document? What happens if I show higher amount of LTCG as per calculations based on the amount of agreement for sale.? and also what implications I have to face , if I show the amount of LTCG based on the sale amount of Circle rates?
@Chawla Savi
Registration document will be valid for LTCG computation and not sale agreement.
Circle rate or actual selling price, whichever is higher should be considered for computing LTCG.
Dear Batraji
The purchaser is reluctant to get the house registered at actual sale price as he wants to save on stamp duty amount.He the purchaser ready to give in writing on plan paper that he has paid so and so amount,Can I compute the LTCG on the basis of his statement on plain paper that he has paid such an amount.
@Chawla
Stamp duty cannot be saved by registering property for less amount than circle rates, As stamp duty is charged on circle rate and actual sale price, whichever is greater.
LTCG cannot be computed on basis of a plain paper statement of payment.
if we have sold our residential property and out of that capital gain we will purchase residentail propert and Commercial property , then what is the implication of tax ? can we have to pay LTCG on Purchase of Commercial Property /
@Pankaj
There is no tax benefit available on buying a commercial property from gains. Its only available for buying a residential house property or capital gain bonds.
Dear Mr Pankaj.
What will be the effect of DTC for selling an old house property and buying a new one?
@B Mohan
If cost of the new house will be more than gains computed with indexation benefit, there won’t be any income tax on gains.
After direct tax code, there will be some changes in how capital gains are computed, base date of acquisition will be changed to 1st April, 2000 from 1st April, 1981.
My grandparents had a building built which has passed on to their children and us. I am one of the legal heirs of the property with my brother as my mom has passed away.Now we plan to sell the property to a builder but keep a owners building for all legal heirs with a flat each. But I donot have a flat in the old building. I have been told that if I had one I would save on long term capital gain tax on the new flat and money from sale. My elder brother who has a flat in old building will apparently not have to pay it. Is this true?
@Parag
Even if you did not own a flat in old building, you had a share in the property as a legal heir.
Long term capital gains would come up if your share in property is sold and you will need to compute the LTCG by indexation rules. After this if a new residential property is purchased by you from this gains, you would be able to save income tax.
Dear Pankaj,
Thanks for the valuable information you have shared. Please help with this:
We have sold a residential property under my mom’s name in this month. Can she gift the money received from the sale to me to avoid capital gains tax? The plan is to buy a new home on my name at a later time and avail a bank loan.
@Praveen
Your mother cannot gift long term gains to you to avoid income tax. First she would need to pay income tax on LTCG and then she can gift it to you.
To save income tax on LTCG, a new residential property should be purchased in her name (single or jointly owned) u/s 54. She may also deposit capital gains into capital gain bonds to save income tax u/s 54EC.
Thanks Pankaj. Just looking for this clarity – Should the reinvestment amount be the capital gain or the total amount for which it was sold. For example, bought for 9 lacs and sold for 20 lacs. Should we show reinvestment of just 11 lacs or the entire 20 lacs to claim benefit?
@Praveen
If sold asset is a residential house property, section 54 applies and only capital gain amount has to be reinvested.
But in case asset is any other (plot, commercial property, gold, unlisted stocks etc), section 54F applies and whole sale consideration has to be reinvested.
Capital gains amount has to be computed with indexation benefit only (which will come less than normal calculation of sale price – purchase price).
Thanks but i know I am to pay.
My doubt is will my bro save on ltcg tax becoz he has a flat in his name.
Also I have a commercial clinic in the same building so will I have to pay ltcg tax separately for clinic and for property. I will get a clinic and a flat in new building. Thx for prompt reply.
@Parag
Income tax on LTCG could be saved by reinvesting into a new residential property.
Both you and your brother will have LTCG on your share in property (either commercial or residential). As in turn you will be getting property in new building, You could save income tax on gains.
Thanks a lot. Things clearer. But my second query is do I have to pay separately for my commercial clinic and for my. share as owner of plot of the land on which building stands.
@Parag
In case your commercial clinic is not being sold, but reconstructed, there won’t be any capital gains.
Whatever you receive from your share in plot sale, LTCG would be applicable on that.
Thank you so much. Things are very clear.
I have a housing loan (taken in 2005) of 6 lacs. Recently I sold a plot with 2 lacs capital gains. If I repay Rs. 2 lacs ( to the extent of my capital gains) my housing loan, can I get tax exemption on my capital gains.
@Murali
There is no tax benefit available on payment of home loan due from long term capital gains.
Either you will have to buy a residential house property or invest into capital gain bonds to save income tax on long term gains.
Respected Batraji.
I am a bit confused. Pl help. My LTCG on sale of house is Rs. 25.34 Lacs which I deposit in a Nationalized Bank under Capital Gain Account. Now I book a under constuction house of a reputed builder which may cost me rupees 33.25 Lacs.I understand that I am supposed to utilized this amount with the Bank by the end of two years from the date of sale of my house. I start paying instalements to the builder and builder fails to give me possession of new booked house within time frame. By the end of time frame only say 3 Lacs are left in my bank.Am I supposed to pay Long Term Capital Gain on rupees 3 Lacs (which is unutilized amount) or full amount of LTCG which is 25.34 Lacs.
@Arjan
As your did not get possession of new house within two years, income tax would be applicable on long term gains. So in this case you would need to pay 20% income tax on whole LTCG (25.34 lakh).
Respected Shri Pankaj Batra
I and my wife with 50% share have purchase a flat at mira road in the year sept 2003 for total cost of Rs 4,25,920 (Rs 212960 each)
We have sold the above flat in june 2011 for a value of Rs 20 lacs.
My wife has purchase a flat at new panvel in the year june 2009 jointly with son, I am not investing the gain amount in purchase of any property, beacuse the amount realised from the said flat has been utilised in the payment of loan obtained by my wife and son at the time of purchase flat at new panvel.
If we both invest Rs 1.50 lacs each in the infrastructure bonds during this year, then kindly let us know how much tax we have to pay. during the fy 2011-12 I have no any salary income but may have bank interest around Rs 6,000 and my wife is working in NPCIL having salary income appox Rs 5 lacs
Kindly let me know the capital gain tax payable during the year and when it has to be paid, whether any advance tax required to be paid by us.
Kindly adivice in the matter.
Thanking You
Yours Sincerly
Vijay Parab
@Vijay
Below is computation for long term gains:
Purchase Year = 2003-04, Purchase Cost = 425920, Cost Inflation Index (CII) for purchase year = 463
Sale Year = 2011-12, Selling price = 2000000, CII for sale year = 785
Indexed Purchase price = 425920 x (785/463) = 722132
Long term capital gain = 2000000 – 722132 = 1277868
Thus, each of you will have gains of around 6.4 lakh.
If possession and registration of new panvel flat was completed before July 2010, then income tax benefit for that purchase cannot be taken as per section 54.
If you both invest 1.5 lakh each into capital gain bonds before Dec 2011, then your taxable long term gains would be reduced to around 4.9 lakh.
As your wife is already earning and have income of 5 lacs, she would have to pay 20% income tax on remaining long term gains of 4.9 lakh.
As you have only interest income, you can reduce taxable long term gains by 1.74 lakh (1.8 lakh – 6000 as there is no income tax till 1.8 lakh for men) and pay 20% income tax on remaining 3.16 lakh.
If your age is more than 60 years, you can even further take 2.5 lakh exemption limit.
Each of you should pay 30% by 15th Sept, 60% by 15th December and rest of income tax by 15th March.
Hello Sir,
As advised by my CA and Yourself I wish to open a Capital gains account (long term) in my bank, a leading Nationalized Bank, but the manager or the guys at the head office do not have the forms or know the procedure to do so as they dont have a single capital gains account in any of their branches and are busy searching for an old circular since 2 weeks. Where can I download or get all these forms, A,B,E,G or relevant forms as advised by you? Does each Bank have a different format and are forms downloaded from the net okay.Am I supposed to take a receipt from them clearly stating CGAS to avoid screw-ups on their part. Eagerly awaiting your reply. Thanking You,
Regards,
Rohith Shetty.
@Rohith
I am not sure if downloaded and printed forms would be accepted at bank branches.
If your current bank is not helping out, you may go to any other bank.
Also please answer to a similar question below: http://www.socialfinance.in/questions/1661/long-term-capital-gain-account
we brought a flat and it got registerd in october 11, now we want to sell our plot and repay the loan. how to deal with capital gains
@Manasa
We are assuming that plot has been in your name for atleast three years.
As you have recently bought residential flat, you can take income tax benefit u/s 54F. In order to take benefit plot needs to be sold within one year from flat registration. If cost of flat is more than selling price of plot, there won’t be any income tax payable on long term gains. If cost is less, income tax benefit would be applicable in proportion.
Moreover, u/s 54f following conditions have to be fulfilled:
1. You should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
2. If total residential houses owned by you is two (including new property), 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 property should not be sold before next three years.
1. I have purchase land amounting 2.00 lac January,2008 and sale it 5.50 lac on October,2011. is it taxable.
2. Same F.Y. I Construct Residential a bulding for personal use, Approx Amountiing Rs.8.00 Lac.
3. Same F.Y. I Purchase a Residential Building Amounting Rs.16.00 Lac
How to save tax on profit of Sale of Land
@Sanjay
1. Yes, gains from plot sale would be taxable as per below computation:
Purchase Year = 2007-08, Purchase Cost = 200000, Cost Inflation Index (CII) for purchase year = 551
Sale Year = 2011-12, Selling price = 550000, CII for sale year = 785
Indexed Purchase price = 200000 x (785/551) = 284936
Long term capital gain = 550000 – 284936 = 265064
Income tax on capital gain = 265064 x 20% = 53012.8
2. As you have already constructed and purchased new residential house properties for cost more than sale consideration of plot, you can get tax benefit u/s 54F.
But following conditions needs to be fulfilled:
a. You should not be owning more than one residential house(flat/house/apartment) at the time of buying new property.
b. If total residential houses owned by you is two (including new property), 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.
c. New property should not be sold before next three years.
Other way to save long term gains is to invest into capital gain bonds within six months of plot sale.
Respetiem limit tocted Batra ji
if I buy an under construction property through booking, what is the permissible time limit two years or three years.Please do reply.
@Savitri
You should get possession of new property within two years of old property sale.
Hi Sir,
I purchased a flat in 2006 for Rs 13 lakhs (Agreement Value) and got in registered for only Rs 9 lakhs only( Circle Value or Government Value). Now i have sold this flat in oct 2011 for Rs 24 lakhs (Agreement Value) . The Registered value for this flat is being done for the value of Rs 21.50 lakhs .I have three question .
1. Which value has to be considered for computation i.e should we consider AGreement value or Registered Value for calculating LTCG ?
2. How much is the LTCG to be paid by your calculation ?
3. Can i invest the Value in LTCG in purchase of a plot or should it be invested only to purchase residential house.
@Manoj
Your query has already been answered on SocialFinance.in (http://www.socialfinance.in/questions/1801/ltcg-on-house-property)