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.
Dear Pankaj,
Greetings.
I am owning a plot registered in my name , bought in the year 1991 for Rs.90000/- and another plot , which is jointly owned by me with my husband , the same was also bought by us in the year 1991 for Rs.90,000/-. Now, both plots were sold in September, 2011 . Sale price of the plot in my name was sold for Rs.75 lacs and the sale price of the plot held by me jointly with my husband was Rs.75 lacs.
As we are senior citizen , we do not wan to invest the sale proceeds in the residential property .
Where as we both( me and my husband) would like to invest in the capital gains bond to avail the tax exemption. Now I would appreciate to get your advice for the following.
1. What would be the Long term capital gain ?
2. How much me and my husband should invest in the capital gains bond?
3. How much income tax. me and my husband should pay on the long term capital gains.
4. When the tax should be paid and the maximum amount should be invested in the capital gain bond to avail the exemption?
Thanks in advance for your advice.
Chandra.
@Chandra
1. Long term gains computation is shown below:
Purchase Year = 1991-92, Purchase Cost = 90000, Cost Inflation Index (CII) for purchase year = 199
Sale Year = 2011-12, Selling price = 7500000, CII for sale year = 785
Indexed Purchase price = 90000 x (785/199) = 355025
Long term capital gain = 7500000 – 355025 = 7144975
2. Max 50 lakh can be invested into capital gain bonds by a person in a financial year. So you don’t have any other option but to pay income tax on remaining unused sale consideration proportionally. You should invest 50 lakh and your husband should invest 37.5 lakh.
3. If your husband invests 37.5 lakh into capital gain bonds before six month from sale of plot, he won’t have to pay any income tax.
In your case total income tax payable is shown below:
a. on single owned plot:
Invested Amount in capital gain bonds = 5000000
Non-exempted capital gains = 7144975 *(1-5000000/7500000) = 2381658
Income tax on non-exempted capital gains = 2381658 x 20% = 476332
b. on jointly owned plot:
Long term capital gain = 7144975/2 = 3572487.5
Income tax on capital gain = 3572487.5 x 20% = 714497.5
Whole income tax has to be paid by 15th March 2012, but 60% of same has to be paid by 15th Dec.
Dear Pankaj,
Thank you for your advice. I hope, I can make use of the sale proceeds to pay the Income tax.
chandra.
Is there any CGT on gift deed?
@Nilendra
There is no capital gain tax on gifts received.
Rather gift tax is applicable, but that too is applicable in case gift is received from a non-related person (most of the relatives are covered under non-taxable rule).
Does purchase prices includes expenditure incurred for brokage payed, agreement cost and other cost also?
@Nilendra
Purchase price may only include stamp duty and registration amount paid apart from cost.
I have purchased a property in 2008 for 7 lakhs. Spent 3 lakhs on refurbishing and paying off dues, i.e. society, brokerage, etc.. Now plan to sell for 17 lakhs, approximately 2.5 years from purchase. Plan to invest in another upcoming property. What are the tax implications, and what are the options through which I can save tax? If I still have to pay tax, what will be the amount?
@Thomas
If property has not been kept in your name for atleast three years, gains from it would be considered short term. In that case there is no income tax benefit available and whole gains will be added to you taxable income and would be taxed as per slab rates.
Taxable gains will be selling price – purchase cost.
Hi pankaj, I wish to know if I am selling my land in sohna gurgaon how shall I reinvest the money to avoid tax on the money earned by capital gains and what are the suggested bonds and FD or any specific investment which I can make to avoid tax on the amount earned.
Please advise thank you.
@Ajay
To save income tax on capital gains earned from sale of plot, you can either buy/construct a residential house property (u/s 54F) or invest into capital gain bonds (u/s 54EC).
I and my husband own a plot jointly.
We sold our plot jointly after 4 years.
We invested the entire proceeds jointly in a new house. We have only this house.
Since I have no income or even pan number the entire transaction was shown as LTCG and reinvestment by my husband in his IT returns. Now IT officer says I have to file returns showing 50% of LTCG.
Is it necessary. Can’t I give declaration that the entire gains may be shown against my husband’s name.
@Sapna
Gains have to shared by joint owners in same ratio.
You could have shown LTCG on your share and claim tax benefit as you already purchased a new house.
There can be a workaround, if plot was purchased from amount totally provided by your husband then gains can be shown totally in husband’s name.
Hi Pankaj,
I along with the neighbouring plot owner are planning to accept joint development agreement with a builder. The plots were purchased in 1995.
We will be getting a token advance and 40% of super built up (4 apartments each). Understand that only one of the apartments received would be exempt from LTCG tax. Can we use other sources of funds or loan to invest in LTCG tax exemption bonds to save on the capital gains tax? Is there any other way to save on the LTCG tax
Thanks & Regards
Ram
@Ram Das
There is no clear cut provision from income tax department which says that both section 54/54F (residential property) and 54EC (capital gain bonds) can be applied simultaneously.
As your case would complex one, I would suggest you to consult a tax professional experienced in property matters.
Hi Pankaj,
My father is selling his property in Bandra, Mumbai after 30+ years in 2011. The property was purchased in 1977 for Rs 1,00,000 (1 lac).
Now taking into account the Indexed value formula and the index value in 2011 as 785; I get: (1,00,000 x 785/100) = Rs 7,85,000
Could you confirm if this is correct?
@Manoj
As cost inflation index was started in 1981-82, you should take fair market value in April, 1981 for computation.
Say, fair market value of property was 1.2 lakh in 1981, then indexed cost in 2011-12 would be around 9.42 lakh.
Hi
My father is a senior citizen and constructed a ( buy land+construction) house
( Read only Ground flooor) in the year 1982 by taking House building loan as he was a central govt employee. ( approx cost price was around 1.5 lakhs all put together for land and house)
In 2010 he again constructed the first floor of the House and this time around the cost of construction was approx 5 Lakhs.
Now if we plan to sell the house, I have the following questions
1) how exactly the purchase cost of the house will be calculated and indexation done in this case?
2) Do we need to calculate long term capital gain for the landprice+ groundfloor and Short term capital gain for first floor of the house.
3) What is the valid documentation proof I need to provide to prove my quoted Purchase cost of the house as he does not have recipts/ invoices etc for amount spent on house construction on and above the loan amount that he had spent in the year 1982.
4) If he does not want to invest in real estate once again after the sale of property, what options he has to save Short term or longterm capital tax whatever the case may be.
Highly appriciate your advice.
Regards
Amit
@Amit
Long term gains would be computed by following method:
Purchase Year = 1982-83, Purchase Cost = 150000, Cost Inflation Index (CII) for purchase year = 109
Construction Year = 2010-11, Construction Cost = 500000, Cost Inflation Index (CII) for Construction year = 711
Sale Year = 2011-12, Selling price = X, CII for sale year = 785
Indexed Purchase/Construction Cost = 150000 x (785/109) + 500000 x (785/711) = 1632314
Long term capital gain = X – 1632314
I think, as the property is single piece, you may compute long term gains on property as whole.
If asked by income tax department (in case of scrutiny/show cause), you may need to show proof for construction cost. Any payment to builder, material supplier etc can be shown for same.
If it would be short term gain, there is no provision to save tax.
But in case of long term gain, so save income tax, either a new residential house property can be purchased (u/s 54) or investment in capital gain bonds (u/s 54EC) can be done.
Thanks Much Pankaj!! Appriciate it..
Amit
Hi
I want to sell my house which was purchase before 4 years (2006) in Rs.4,00,000 approxi and now want to sell it with Rs.30,00,000 what will be LTCG if i dont invest in new property and Is it neccessary to sell at market value ?
@Mitul
Please find below computation for LTCG and income tax on it:
Purchase Year = 2006-07, Purchase Cost = 400000, Cost Inflation Index (CII) for purchase year = 519
Sale Year = 2011-12, Selling price = 3000000, CII for sale year = 785
Indexed Purchase price = 400000 x (785/519) = 605010
Long term capital gain = 3000000 – 605010 = 2394990
Income tax on capital gain = 2394990 x 20% = 478998
If house is sold at a price less than government circle rate, then also capital gains would be computed at the circle rate price minimum.
sir,
i bought a plot in 1990 for 40,000 . now its value is 70 lacs . i want to sell it and buy a another plot of equal value. how much income tax i am entitled to pay.
@Anurag
Your query has been already answered on http://www.socialfinance.in/questions/1891/long-term-capital-gain
Hi Pankaj,
We have sold a plot for 20.5 lacs this year, bought at 9.5 lacs in 2005. We want to buy a flat to avoid capital gains on this transaction, but the builder is able to give possession only in August 2012. Will I be able to avoid capital gains tax if the amount is deposited in capital gains savings account scheme of nationalised bank. Or should I take possession of flat before 31st March 2012?
@Praveen
Please find capital gain computation below:
Purchase Year = 2005-06, Purchase Cost = 950000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 2050000, CII for sale year = 785
Indexed Purchase price = 950000 x (785/497) = 1500503
Long term capital gain = 2050000 – 1500503 = 549497
Income tax on capital gain = 549497 x 20% = 109899.4
Under section 54F, You can save tax fully, if you buy a residential house property for price more than sale consideration (20.5 lacs) and get possession for same within two years of sale of plot.
As you won’t be able to get possession of new flat before 31st July, 2012 (income tax filing last date), you would need to open a capital gain account and pay payment for flat from there.
i sold a residential property (as a sole owner) and reinvested all capital gain in a new house with joint ownership with my wife (50:50). My question is: will i need to pay any tax on capital gain due to joint ownership of the new house?
Please note that all the capital is financed by me from capital gain of the old house.
Please help.
@Jayesh
There won’t be any issue with joint ownership of new property. Only point you need to keep in mind that, value of your share in property must be more than capital gains from old property, to save tax fully.
Dear sir me and my father have a flat in joint name purchased for 19 lakh in the year 2007. and sold it on oct 2011 i. e. after three years.
1. What would be the Long term capital gain ?
2. How much me and my father should invest in the capital gains bond?
3. How much income tax. me and my father should pay on the long term capital gains.
4. When the tax should be paid and the maximum amount should be invested in the capital gain bond to avail the exemption?
5. Any ways to save the income tax?
Thanks sir
Read more: http://www.pankajbatra.com/india/how-to-save-capital-gains-tax-ltcg-when-selling-land-plot/#ixzz1asfte4cQ
@Gitanjali
1. Please see below computation for LTCG. Substitute X with selling price.
Purchase Year = 2007-08, Purchase Cost = 1900000, Cost Inflation Index (CII) for purchase year = 551
Sale Year = 2011-12, Selling price = X, CII for sale year = 785
Indexed Purchase price = 1900000 x (785/551) = 2706897
Long term capital gain = X – 2706897 = L
2. To save tax fully, both you and your father should invest atleast L/2 into capital gain bonds. Max investment of 50 lacs per person can be done in a financial year in such bonds. This investment must be done within six months of sale.
3. If investment into capital gain bonds or into a new property is not done, You and your father would have to pay 20% income tax on L/2 each.
4. Income tax should be paid by March 2012.
5. Income tax can be saved by investing into capital gain bonds (u/s 54EC) or into a residential house property (u/s 54).
Dear sir which date should be considered for computing three years period
1. Date of agreement with builder
2.Date of application for completion certificate by builder to corporation
3.Date of completion certificate
4.Date of possession
5.Date of sale deed
@Gitanjali
Ideally Date of possession needs to be taken. But if due to some circumstances, you don’t have possession letter, you can use date of sale deed.
Dear sir can the date possession be
1. on the date of application for the completion certificate?
2. or Date prior to the completion certificate
@Gitanjali
Date of completion on Completion certificate should be before possession date.
Dear Sir,
My father was having a residendtial flat purchased in the year 1989 for 2.75 lac which we sold in July 2011 for 14 lacs. He has purchased another flat and invested 10 lacs from 14 lacs for purchase of new property. the remaining amnt of 4 lacs he wants to use for his personal use. Will there be long term capital gain tax on the remaining 4 lacs if he uses it for personal use? If yes how much it will be? Please guide.
@Yallesh
This query has already been answered on http://www.socialfinance.in/questions/1919/capital-gain-tax
Hi Pankaj
I bought a flat in 2001 for 11 Lakhs and planning to see it now for 30 lakhs to my cousin. Meanhwile I am constructing a house and the cost of 50 Lakhs out of which I have taken 30L loan. From the sale proceeds, I am planning to repay 15 Lakhs and still have the 15 L loan outstanding. Can you let me know how best can I avoid the tax? I am open for long term Infra FD also.
And thanks Pankaj for serving thousands of people online! Please keep up the good work.
Thanks Ganesh, Anitha
@Ganesh
Your capital gains come out around 9.75 lakhs.
Purchase Year = 2001-02, Purchase Cost = 1100000, Cost Inflation Index (CII) for purchase year = 426
Sale Year = 2011-12, Selling price = 3000000, CII for sale year = 785
Indexed Purchase price = 1100000 x (785/426) = 2026995
Long term capital gain = 3000000 – 2026995 = 973005
In order to avoid income tax on this long term gains, you will have to spend atleast 9.73 lakhs on new house construction or new house purchase.
As you are already constructing a house for cost much more than this gains, there won’t be any income tax liability.
Dear Mr. Pankaj Batra, I have a small query and hope to get answer from you. My Mother In Law owns a plot (land). As my father in law is suffering from kidney ailment and requires regular dialysis, she is planning to sell the plot and keep the proceeds in Bank Deposit. The Interest earned on the deposit will be used for medical expenses. My question is will Capital Gains tax attract this transaction? please advice. Your immediate reply will help us in taking decision in the matter.
@Kiran
Capital gain would be applicable in any sale of such asset like plot, house, gold etc. Seller would be liable to pay income tax on the gains.
Long term gains (plot kept for more than three years) and income tax would be computed as per below calculations.
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%
I have a plot of land to be sold for 60 lakhs. I would like to keep this money in banks . can you please highlight how we can arrange to have the bank account and what will be income tax to be paid ?
@Dr. Shanthakumar
Please compute capital gains and income tax from following formula:
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%
You can save this income tax fully, if you buy another residential house property for amount more than 60 lakhs (u/s 54F) or invest into capital gain bonds (u/s 54EC).
thanks mr.pankaj. since we are old people I would like to keep all this money in bank then how the interest and income tax calculations gets in.
Dr.M.Shanthakumar
@Dr Shanthakumar
After paying income tax on gains, you are free to keep money into your bank account.
Interest on bank deposit would be taxable, would be added to your taxable income and taxed as per normal tax slab rates.
i sold a house of Rs. 31.5 Lac on nov. 2011, this house is purchased by mr Dada G. and after taht this house owner is my father , and after my father 31.03.1997 automatically house owner is me. i have no purchase value , please guide me regarding capital gain & tax
@Abhi
Its not possible to compute long term gains without purchase cost (which was paid by your grandfather).
If the house was purchased before 1981 by your grandfather, you can consider a fair market value as in April, 1981 as purchase cost.
Once you have that, you may compute income tax and long term gains by using following formulas:
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%
Thank you for clearing my doubt. Regards, Kiran
can a exemption of 54 is applicable on purchase of two different properties situated at two different area out of capital gain
@Sadique
Benefit for section 54 can only be taken against a purchase of single residential house property only.
Dear Mr.Pankaj,
My age is 55 and I am retiring soon.
I bought a site in Chennai in 1992 for Rs.30000. I sold the site for Rs 45 Lakhs in Nov 2011.
I already have a house. I would like to purchase/construct another house in my name using the above amount. Can I do that without paying tax? If Yes,
a) what is the duration in which I can complete the construction/ or purchase from a builder.
OR
Can I purchase a site and construct in the same without paying tax.
OR
Can I construct the house in the site already existing in my wife’s name, and also avoid tax.
What is the alternative method of investing this amount without paying tax.
I came to know that we can invest the amount for a 3-YEAR period to avoid tax. but, should I pay tax at the end of the 3-YEAR term. Please advice.
Thank you
Rasheed
@Rasheed
You can purchase a new house or construct new one without paying income tax on earlier property sale u/s 54F (assuming earlier site was not a residential house property, if it was then section 54 will apply instead of 54F).
1. If you get house constructed yourself, it should be completed within three years of sale. If you buy from builder/resale, possession should be taken within two years from sale.
2. You can purchase land and get house constructed on same. Three years time-frame would be applicable.
3. You won’t be able to claim tax benefit, if land is not in your name in case of construction.
Other method to save tax is to invest into 3 years capital gain bonds, u/s 54EC. This has to be done within six months of sale. At the end of 3 years, interest earned from investment would be taxable like any other income like bank interest.
Dear Mr. Pankaj.
Thanks for the clarification.
with regards
G A RASHEED
Dear Pankaj,
You have posted very useful information on this site. Thanks for that.
I have a residential house under my fathers name which he has sold for 45 lacs this year with the full agreement getting completed in Mar 2012. The house was build in the year 1980. I have got two questions related to this and please excuse if this has been posted here and have totally missed it but would really appreciate if my queries can be answered –
1. Can I partially invest in buying a land and partially in buying a residential flat and save all the tax ?
2. How much tax will be liable on me and by what timeframe do I have if I have to pay tax.
Warm Regards,
Saurabh
@Saurabh
1. You need to compute long term gains on house being sold. In order to save tax on that long term gain, only single residential house property has to be bought or constructed u/s 54. Or investment in capital gain bonds can be done u/s 54EC.
2. Please see LTCG computation formula below:
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%