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.
Hi Pankaj.. intend to sell of my flat and hope to get around 1.5 crore for it. I dont want to buy another property but am interested in investing it in Capital bonds so that I can get the interest since I have no other source of income. You said earlier that in one year only 50 laks can be invested. So what am I to do with the other ! crore? Will I have to pay tax on it? That would be very hard on me since like I said I am in need of money to survive.The cost of the flat was 20 lakhs and was purchased in 1996. What will be the deductions etc? Please advise.
@Sidhi
If you are selling flat, you need to compute long term gains first with below method.
Purchase Year = 1996-97, Purchase Cost = 2000000, Cost Inflation Index (CII) for purchase year = 305
Sale Year = 2011-12, Selling price = 15000000, CII for sale year = 785
Indexed Purchase price = 2000000 x (785/305) = 5147541
Long term capital gain = 15000000 – 5147541 = 9852459
In order to save income tax fully on sale of flat u/s 54, you would only need to invest long term gains part (around 1 crore) and not full sale consideration. Moreover 50 lakh can be invested into capital gain bonds per financial year and this should be done within six months of sale. If your six month period falls in two different financial years (say you sold in Jan 11), then you would be able to invest total 1 crore (50 lakh in each FY).
Hello Pankaj,
My father has property which he is going to sell for Rs 20L. It was ancestral property so original price is not known. In such cases how the capital gain tax calculations are done.
Moreover I have further question, I have a purchase a residential property and I have a bank loan of 27L outstanding Loan amount.
My Question is, Can I use gains from property sold and pay my loan ( as I am the legal hier of my father) and repayment of loan can be interpreted as the investment in the residential property hence availing the benefit for exemption on Capital gain tax?
Please suggest..
@De
You need to use below computation with purchase year assumed as 1981-82 and purchase cost as fair market value of property in 1981.
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%
First, there is no tax benefit available for paying home loan from long term gains. Tax benefit can be taken on purchase of residential house property or investment into capital gain bonds.
Second, If your father is selling property, income tax liability will be his and if you purchase any property, there won’t be any tax benefit. New property should be in the name of same person who got long term gains.
If you have bought new property within one year before sale of ancestral property and you want tax benefit, first you can get old property transferred in your name through a settlement deed and then sell it. It will create long term gains on your name and you can claim tax benefit on new house purchase.
Hi Pankaj,
I have a plot of land which I had purchased for Rs. 8 lakhs 9 years ago and I am planning on selling the same plot for present market value between Rs. 70 to 80 Lakhs. I want to purchase a residential flat and would like to use the Long Term Capital Gain from this sale to purchase the new residential flat for Rs. 85 lakhs.
I have following queries which needs to be cleared:-
I already have 2 properties (not including the new redential flat) registered in my name. So if I sell a plot of land and buy a new flat (3rd Property) would I be able to take advantage of LTCG under sec54 or 54F to avoid LTCG tax? If not, Is there any way (legal) by which I can circumvent this provision made under the IT Act, 1961.
Can I purchase a residential flat first and later sell the plot of land and adjust LTCG from sale of plot somehow under LTCG? If yes how much time do I have to sell the plot of land once I buy a residential flat to take advantage of LTCG under IT Act? If not then, Once I sell the plot of land how much time do I have to buy a new flat to take advantage under this scheme?
What is the maximum amount of LTCG that can be invested in 1 year to avoid tax and Is FY calculated for this purpose? Some example given by you to enumerate my case would be very insightful. Thanks Prabhu
@Prabhu
Your query has been already answered on http://www.socialfinance.in/questions/2184/can-i-purchase-a-residential-flat-before-selling-a-plot-of-land-and-get-benefit-of-ltcg
hi Pankaj,
can we buy 2 or 3 residential properties by selling 1 ??
Thanks,
Kartik
@Kartik
If you want to save income tax on long term gains, tax benefit would only be available against single new property.
To save tax fully, new property cost must be more than capital gains earned u/s 54.
Can LTCG be saved if you have third property (Not involved in buy and sell) by selling first property and buying new property?
@Nilendra
If at the time of selling first property, you don’t own more than two residential house property, tax benefit can be availed for LTCG u/s 54F.
hi Pankaj,
my father purchased a piece of land for Rs. 80000 in the year 2002-2003 & sold a piece of land for Rs. 50 Lakhs recently. My question is 1. Whether he can purchase the commercial property from the sale proceeds? 2. how can we avoid the LTCG tax?
Thanks for your reply.
@Puneet
if your father purchases a commercial property, there won’t be any tax benefit and he will have to pay income tax on long term gains arising from land sale.
To save income tax on long term gains, section 54F or 54EC can be used. Under section 54F, one can invest into a residential house property to save tax. Under 54EC, one can invest into capital gain bonds.
Hi Pankaj,
I purchased a commercial shop for Rs 23lacs in year 2006 and sold it in Aprill 2011 for 50lacs. I bought an agricultural plot for Rs 9.5 lacs and a residential flat for Rs 16 lacs, as am totally aware that residential flat comes under capital gain exemption . Please let me know that does this agricultural plot comes under capital gain exemption or not ??
Thanks,
@Kapil
There is no tax benefit on purchase of agricultural plot, if gains have arisen from sale of a commercial property.
Thanks Pankaj Ji,
Sir my query is , I purchased a commercial shop in 2005-06 for Rs 2436000/- and sold it for Rs 5500000/- in 2011-12 , kindly brief me the capital gain calculations for these amounts . What would be the capital gain and what would be the tax amount if I will to pay the tax?
@Kapil
Purchase Year = 2005-06, Purchase Cost = 2436000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 5500000, CII for sale year = 785
Indexed Purchase price = 2436000 x (785/497) = 3847606
Long term capital gain = 5500000 – 3847606 = 1652394
Income tax on capital gain = 1652394 x 20% = 330478.8
Thanks very much Pankaj ji…
Hi Pankaj
I am Suma from Bangalore. I am planning to sell my residential property which may cost around 40lakhs purchased in 1998. My husband expired n I am planning to invest the money to get income monthly becoz I don’t have any financial support. plse advise me.
@Suma
To save income tax on capital gains earned from selling a residential property, you can invest the gains into capital gain bonds u/s 54EC.
hi pankaj,
i want to know about benefits to investor for investing in agriculture land and producing crops what type of tax benefits they get ,
@Aniket
If you have gains from selling any asset other that agricultural property, then there is no tax benefit on investing into agricultural land.
Regarding income from agricultural activities, you can get income tax benefit on such income.
Hi,
Thanks for your info on DTC. It was very helpful
I have a doubt regarding long term capital gain tax.
I had purchased my house(primary residence) in 1965 for 2 lacks & selling it in 2012 for 75 lacks.
Q 1> How much Capital gain tax should i pay?
Now say after 3-4 months after selling my residence i now purchase a individual house/villa for 45 lacks. use around 30 lacks to construct 2 more floors(individual floors) * I have invested all my money gained from earlier residence.
If within the same financial year if i sell my 1st & 2nd floor for 50 lacks. The ground floor will be used by myself as primary residence.
Q2> In the above mentioned scenario How much Capital gain tax should i pay?
Thanks a lot
@Ajay
Cost inflation index is only available from 1981-82, so you would have to assume a fair market value in April, 1981 to compute long term gains.
In below example computation, I am assuming market value of house in 1981 as 4 lakh. Please change it accordingly.
Purchase Year = 1981-82, Purchase Cost = 400000, Cost Inflation Index (CII) for purchase year = 100
Sale Year = 2011-12, Selling price = 7500000, CII for sale year = 785
Indexed Purchase price = 400000 x (785/100) = 3140000
Long term capital gain = 7500000 – 3140000 = 4360000
Income tax on capital gain = 4360000 x 20% = 872000
You can claim tax benefit if you are buying/constructing another house. If new house cost is more than long term capital gains (43.6 lakh above), then there won’t be any income tax payable u/s 54.
If you sell part of the new house within three years of buying, it would attract short term gains and then income tax would be applicable and there won’t be any way to avoid that tax.
Dear Pankaj,
I had booked 3 residential flats in May 2009 in an under construction project (each costing approx 60 lakhs). For 2 of these flats, i availed home loan from hdfc in a special scheme where I paid only 20% and balance 80% was approved by HDFC. The 80% will be disbursed at the time of possession which is expected in oct 2012. The 3 rd one is self funded where i have made 75% payment on construction progress basis. I have an offer of 90 lakhs on the 3rd property which if I accept than I will not have the need to avail home loan disbursement of approx 1 crore. What I am worried about is 30 lakhs gain on 3rd property taxable even if I am reinvesting this funds in other properties owned by me. I have registered the flats which have loan but the self funded one which I intend to sell is still not registered.
I have a very serious offer and am really tempted to sell, need your advice on tax implication and what alternative I have to save tax on this capital gain.
@Mehmood
As none of residential flat have been owned by you for more than three years (ownership starts from date of possession/registration), if you sell any of these flat it would be a short term capital gain.
There is no way to save income tax on short term gains. This gain would be added to your taxable income and taxed as per your slab rates.
Dear Pankaj,
Thanks for the advice. If I defer the sale for another 4 months, i will complete 3 years holding period in May’12. When i sell this under construction property in may’12 can i claim indexation benefit and reduce my tax liability. Subsequently, when i have to arrange for balance 80% loan disbursal on other two properties in Sep’12 (completion time) will i be exempt from tax if use the sale proceeds of this 3 rd property for making balance 80% payment to the developer and do nor avail the disbursal of home loan. If there are any other options to reduce this liabilty, plz advice.
@Mehmood
You won’t complete holding period in May 2012. Holding period starts when house is registered in you name and possession is taken.
Three year period would be over only in Oct 2015 (three years after possession). There is no way to save income if you sell if before this three years.
i brought agriculture land in 1999,2000,2004,2005 respectively had converted it to industrial use this year and sold recently what will be Tax rates on long term Capital Gains and is any exemption claim can be made
@Nusrath
You would need to compute long term capital gains by indexation method and such gain would be taxed at 20% income tax.
To save income tax on such gain, you can buy/construct a residential house property u/s 54F or invest into capital gain bonds u/s 54EC.
send me the indexation method for calculation
@Nusrath
Here is the indexation method:
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%
what tax implication will be there on a sale of an under construction property. If the property was booked 4 yrs bask (not registered as yet) will it come under long tern capital gain. Also can I offset capital gains with a housing loan I have on another porperty
@Shir
It would be a short term gain as asset was not owned by you for more than three years. There won’t be any tax benefit applicable here.
I had sold a property which got transferred to my name after my father’s death ( after consent from my mother / sister). Now I intend to add some more amount and buy a property with the amount I received. However, I want to know if I can buy that property in the name of my mother and/or sister, without my name in it. Will it cause any tax issue, if my name is not included on purchase of the new property?
@Suhas
As you sold old property, you are liable to pay income tax on it. You can save this tax if you purchase another residential house property in your name only.
if new property is bought on you mother/sister’s name, there won’t be any tax exemption on long term gain tax.
In that case Is it possible to save tax by having the new property on the name of all three of us,i.e., my mother/ my sister and mine?
@Suahas
Yes, tax can be saved even if property can jointly owned.
But only cost of your share in new property would be considered for exemption.
I have a property which I purchase on 2004 for 27lacs and am now selling it for 114 lakhs. What will be a tax implication. I am going to invest in a new flat for 80 lakhs where I am taking aloan for 45 lakhs, can I invest in two properties and will I avoid tax completely by doing so.
@Subashri
There is long term gains of around 70 lakh in your case. This gain is taxable at rate of 20%.
If the property being sold is a residential house property, you can save income tax fully if you buy a new residential house property for cost more than 70 lakh. Tax benefit can be taken only against a single residential house property. If you buy more than one, you would only be able to show one for tax benefit.
sir we have ancestor agriculture land and sold in FY 2011-12 amounting to rs 85.00 lacs. we have no purchase cost. please advise what cost we take for indexation.
@Rakesh
You should take fair market value as on April, 1981 as purchase cost.
Please tell me which of the following two options can be used to save capital gain tax. If one sells gold Jewellery and say gets Rs 10 Lakh. To save a LTCG tax on the sale of gold jwellery:
1) Can it be used to pay an outstanding Home Loan of Rs 8 Lakh and just pay capital gain tax on remaining 2 lakhs?
2) To buy capital bonds worth Rs 10 lakh?
Note: don’t want to invest in new residential property. In case 1) is allowed then would like to pay of the existing home loan.
@Satpal
1. There is no tax benefit on paying home loan. But if possession of house is received within one year before and two years after sale of gold, then tax benefit can be taken u/s 54F.
2. If capital gains bonds are bought within six months of sale, tax benefit can be taken u/s 54EC.
Thanks Pankaj. The house for which I’m paying home loan is still under construction. So if I pay my home loan by selling the gold and then within the next two years will get the possession, then I don’t have to pay any tax on the LTCG for the amount I used to payoff my home loan?
@Satpal
If possession of new house is received within two years from date of gold sale, income tax on gains can be saved u/s 54F.
But you would need to deposit sale consideration of gold into capital gain account scheme before last date of income tax return filing for year in which gold was sold.
However there are below conditions for section 54F applicability:
1. You should not be owning more than two residential house(flat/house/apartment) at the time of selling gold.
2. If total residential houses owned by you becomes two (including new house), 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 house should not be sold before next three years.
Hi pankaj,
My father sold ansistors property, and gave it to me my brother and sister. I got 25lakhs as my share. Do i need to pay tax for it?? Does this money comes under capital gain?? please suggest..
@Geetha
If your father sold property, he would need to pay income tax on capital gains.
There is no tax liability on your side as you received money as gift from your father and not by selling property.
Hey Hi Pankaj,
Wanted to know that if a land I bought in 1998 for 1lakh and now sold for 15lakhs, how can you save or not pay capital gain. Any kind off investment or any kind I can???
@Arka
Either you can buy a residential house property u/s 54F or invest into capital gain bonds u/s 54EC to save income tax.
Hi Pankaj
I live in Austraila. I have OCI n sold a plot in India. I have few questions regarding saving capital gain tax.
If we book an apartment with the builder with the capital gain money today & get possession in two years. when can we sell it? is there any minimum holding period of the property before resale?
When from the date will be counted from the date of booking or possession?
If we buy a ready house with capital gain money , are we allowed to rent it. can we take the rental proceeds out of india after paying tax.
Thanks & Regards
Meena
Hi Pankaj
one more question please.
If i book a villa with a builder today for which the possesion date in the contract is just under 3 years. if the actual posession gets delayed from the builder. will i be still qualified for the capital gain tax exemption under sec 54 F.
Thanks n regards.
Meena
@Meena
You won’t be able to claim tax benefit u/s 54F if you don’t get possession of house within two years of sale.
This duration is three years if you are getting house constructed yourself by purchasing land first.
Thanks a lot Pankaj. This is really very helpful.
@Meena
New property purchased to save tax should not be sold for three years from purchase.
Three years would be counted from date of possession..
If you buy a ready to move house, you can give it on rent. After paying tax on income from house property, you can transfer it to outside India too.
Dear Pankaj Sir,
I have bought my current flat where I am staying for 23 Lakhs 6 years back on a loan of 20 lakh and the current value of the flat is 40 lakhs. Now planning to buy another flat for 50 Lakhs with 40 lakhs loan which is under construction and builder is likely to handover in Jan-2014. Once I get possession of new flat, I am planning to sell the other flat and clear loan for this new flat. Whether I will be coming under capital gain exemption for this particular transaction? Or else how can I save from capital gain.
Thanks
Suneel
@Suneel
If possession of new flat is within one year before and two years after sale of old flat, then you can claim tax benefit u/s 54.
Also, If cost of new house is more than capital gains earned from old one, there won’t be any income tax payable on gains.
Dear Pankaj sir,
I request your help and guidance to resolve confusion and complications in my tax related issue.
I have sold one of my residential house property on 26th June 2009 (registration date).
LTCG is 10.71 lacs. Amount lying in capital gain scheme account.
Now as per IT act I have to purchase another residential house within 2 years or to construct within 3 years.
As already seen from above 2 years are passed from date of transfer and I wasn’t able to buy property. Now I am left with only option of construction.
What should I do out of 3 options:
1. I have booked 1 under construction flat (date of booking 7th jul 2011), paid 4.5 lacs out of capital gain scheme, but it will not be able to complete by 25th June 2012 (3 yrs from date of transfer).
If i pay full amount of capital gain before 25th june 2012 to builder, Does IT dept. will consider it as investment under section 54.
Or
2. Should i buy a readymade complete house and spend some amount on further construction. Does IT dept. will consider it as investment under section 54.
3.Is mere purchasing a new complete house after 2 yrs but before 3 years can be considered as investment under section 54. I.e time limit of buying a house can be extended beyond 2 yrs.
Request your valuable advice.
Dear Pankaj,
Pls reply to my queries. Also clarify about circular 471 of dept.
@Aashish
1. Under construction flat from a builder does not fit into construction rule. You would need to buy land and get house constructed yourself for three years period benefit.
2. If you buy a ready to move house and get it reconstructed, it may save you u/s 54.
3. Time limit for a buying a ready to more/built-up house cannot be extended beyond two years.
Dear Pankaj,
For reply in point no.1, circular no. 471 of Income Tax clarifies that construction will cover under construction flat also, if I invest my whole of capital gain before end of three years irrespective of completion.
Can you throw some light on it ?
@Aashish
Circular 471 on income tax website (http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2009ITAct/sec_054.htm) is on different case where allotment of flat is considered in-spite of possession date.
if you have also received allotment letter from builder, but not possession within two years time, you may also try getting tax benefit.
There is no relation of three years condition with circular 471.
i have agreement for sale(for sale of my old flat) in nov,11 and i have already purchased a flat in may 2010 in an under construction building for which i got the possession only in nov 2011 ,the value of the old property which i sold is 287500 as on 12/04/1994 and sale amt received is 48,00,000/- and the price of new property is 62,00,000/- and property is jointly held by spouse
kindly advice and thank
@Darshana
Assuming that you and your spouse own equal in new property, cost of your share in new property would be 31 lakh.
As this cost is more than gains from sale of old property and you are getting possession of new property within time frame (one year before and two years after sale), you won’t need to pay income tax on long term gains u/s 54.