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.
When out of the sale proceeds of an inherited residential house property a housing loan is repaid, which was taken to renovate/repair the same house property, whether LTCG is applicable? Whether the benificiary again need to borrow money( as he has already repaid the housing loan out of the sales proceeds of the inherited residential house) to deposit the LTCG in a capital gain account for purchase of a new house?
@Subrata
There is no tax benefit on payment of loan from capital gains.
For tax benefit, a new residential house property should be bought or constructed. If possession of new property is not taken before last date of income tax return filing, an amount equal to long term gain has to be deposited into capital gain scheme account for eligibility for future tax benefit.
Do you have any idea of whether supreme court/high court have given decision on whether Cap Gains happen on day of entering into development agreement or when flats are handed over.
@Sapna
Capital gains are booked on date of transfer of property (registered deed and possession).
Hi Pankaj,
We have capital gain from sale of plots and now we are planning to invest that capital gain in a residential property. We would like to invest it purely for investment purpose and may sell the new residential property whenever we get good returns.
Please let me know the consequences, if the new property is sold within 3 years of its purchase, and after 3 years of its purchase. Kindly note that this new property is purchased from the capital gain arised from the sale of plots.
Your guidance will be very helpful.
Thanks & Regards,
Mehta, Mumbai.
@Ankur
In your case section 54F is applicable which has some condition for applicability. These should be followed:
1. Possession of new property must be taken within two years from sale of old property. Or new house can be constructed within three years of sale.
2. You should not be owning more than two residential properties(flat/house/apartment) at the time of selling property.
3. 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.
4. New property should not be sold before next three years.
Hi Pankaj,
Thanks for a prompt reply. I am sorry for not giving all details. Kindly note that new property purchased is within 2 years of sale of old property and there is no other property in my name. But since we stay in joint family, we dont require new property and hence we will sell the property. Please inform us as to whether can we sell the new property before 3 years of the purchase or not. If yes, what amount of capital gain will be taxed, I mean, whether I will be taxed on the profit gained earlier or only the new profit will be taxed (under short term capital).
Let us know.
Thanks & Regards,
Ankur.
@Ankur
If new property is sold before three years, section 54F won’t apply and you would need to pay income tax on long term gains on old property. Also profits earned from selling new property would be short term gains and these would also be added to to your taxable income.
Hi Pankaj, How to calculate the acquisition cost of an asset if its unknown? I know one place is to go to a govt. approved valuer but what if the asset is already sold? for e.g. I sold gold jewellery and got Rs 5 lakhs. I deposited that 5 lakhs into my account. Now how should I calculate LTCG on this 5 lakhs. I’ve the sales receipt from the Jeweller. Should we have to treat this whole 5 lakhs as capital gain or is there a way to come up with the purchase price for tax calculation?
@Jeevan
If asset was acquired before 1981, fair market value as on 1st April, 1981 can be taken.
In case of gold, you can compute on basis of per unit price on acquisition date or in April, 1981 whichever is later. Rate of gold on 1st April, 1981 was Rs 1670 for 24 carats 10 gm.
Following method would be used to compute long term gains on gold sale:
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%
The price for 1981 gold is 1670 for 24 crt gold. How can I reach for a 22 ctg price.
Here are the figures, it would be helpful if you can tell me the amount of LTCG.
Purchase Year = Rec. as gift on marriage in 1978
Purchase Price = unknown
Selling Year = 2012
Selling Price = 989850 (356 gm / 22 crt)
What’s the last date for filling IT return and pay tax? If its March, is it possible to not pay tax and instead invest in the bonds and then file return by July?
@Jeevan
22 crt is 91.6% pure gold. But as other metal are also mixed, 22 crt price may vary. You may assume that 24 crt rate is 1.07-1.1 times that of 22 crt.
Or you may compute LTCG by keeping 24 crt price value on sale date.
If gold has been sold in 2011-12, tax needs to be deposited before 31st march and last date for income tax return filing would be 31st July, 2012.
If you want to save tax, you can invest into capital gain bonds u/s 54EC before end of six months from date of sale.
So that means if the 1981 gold price for 24 crt was 1670. It is safe to assume for the calculation sake that the 22crt price was 1530 (1670×91.6%)?
@Jeevan
You should consider either more than 1530 as rest of the percentage is also completed with a costly metal (copper etc.)
Either you may assume around 1560-1580 or you may assume 24 crt price while selling.
Hi Pankaj,
We bought a house on 16/02/1992 paying 1.75lk. And constructed 1st and 2nd floor by taking a loan of 4.5lk and actual cost was 5.8lk on 01/02/2005. Sold the house on 16/02/2012 for 24lk.
Can you pls let me know what are the docs that are needed to submit for cost of imporvement. I have only housing loan docs and I have lost all other docs like bills and valuation etc.
And also let me know if I can claim a deduction on brokarage spent on selling the house?
@Vivek
Please find below computation for LTCG and income tax:
Purchase Year = 1991-92
Purchase Cost = 175000
Cost Inflation Index (CII) for purchase year = 199
Construction Year = 2004-05
Construction Cost = 580000
Cost Inflation Index (CII) for Construction year = 480
Sale Year = 2011-12
Selling price = 2400000
CII for sale year = 785
Indexed Purchase/Construction Cost = 175000 x (785/199) + 580000 x (785/480) = 1638869
Long term capital gain = 2400000 – 1638869 = 761131
Income tax on capital gain = 761131 x 20% = 152226.2
Documents need not to be submitted with IT return, but in case income tax department raise a query you would need to show them. Bills for construction material, payment to architect and builder etc can be shown as proof of construction. Housing loan won’t really would be considered as proof of expense.
You can deduct brokerage paid from selling price to reduce LTCG liability.
Dear Sir,
My uncle purchase a residential property in 2004 for Rs 10 lakh and wish to relocate to their native place.
The Current valuation of the property is now now around 53 Lakh as per the circle rates.
If they sell this property and but a new one against the same for Half the value of Current Property. What options are available to them for saving tax on Capital gain.
The property is in Join Account of My uncle and aunt, both are senior citizens.
As per my calculations by the details given in your other resolved queries
Sell: 53,00,000(assumed)
Purchase: 23,00,000 (assumed)
Indexed Purchase Price: 16,50,000
Taxable Income: 13,50,000
My Querries are:
Am I correct with the Approx Calculations?
Can the Renovation of New Property deducted in the taxable income?
What can be done to save tax on the Taxable income?
Can 2 Properties be purchased to save the taxable income?
What is the difference between Tax rate with Indexation and Tax rate without Indexation ?
@Ashish
I am assuming that its a built up house/flat/apartment and not a vacant land.
See computation for LTCG and income tax below:
Purchase Year = 2004-05, Purchase Cost = 1000000, Cost Inflation Index (CII) for purchase year = 480
Sale Year = 2011-12, Selling price = 5300000, CII for sale year = 785
Indexed Purchase price = 1000000 x (785/480) = 1635417
Long term capital gain = 5300000 – 1635417 = 3664583
Income tax on capital gain = 3664583 x 20% = 732916.6
Under section 54, To save this income tax fully, your uncle can buy another residential house property for price more than LTCG (36.7 lakh). If new property costs less than this, tax @ 20% would be payable on remaining unused gains.
As property is in joint names, your uncle and aunt will have equal share in gains (18.33 lakh each). To save income tax on these gains, they can either buy new property in joint names for price more than 36.7 lakh or each one can buy house property for cost more than 18.33 lakh. But one person cannot claim tax benefit against two properties purchase.
If more amount is spent in reconstruction of new house, that cost can be added for tax benefit.
Tax calculation without indexation is not available for such property sale.
Thanks for solving the calculations and querry about my taxable capital gain tax.
If suppose my Uncle and Aunt purchase another propery which has value of Rs 20 Lakha Jointly ans spend around 2 lakhs on renovation of the same. will the deduction be made for 22 lakhs or only 20 lakhs.
Also what investment options do u suggest in this case for the rest of the taxable income.
@Ashish
In case 2 lakh is spent on construction work (like adding new floor/room etc), then this cost can be added to property cost. Paintwork, furniture purchase, extra woodwork etc won’t be added to property cost.
Other than new property purchase, investment in capital gain bonds can be done to save tax u/s 54EC.
Thanks a lot for the information 😀
Sir,
We are planning to purchase a flat from the developer in building being constructed(redevelopment).On plan it is mentioned subject to approval of Mumbai Municipal Corporation. How we can check whether the title of land is clear.Which document we should demand from the builder.
Besides, he has already taken flour bed charges in usable carpet.Now, he is telling that he can offer us a 100 sq bigger flat than earlier i.e.400 carpet, if extend the flower bed areas from all the sides.
@Sangita
It would be better to take help from a property lawyer or valuation expert.
Or you can apply for a home loan, they generally does all these formalities before making you an loan offer. It would cost you processing fees of loan maximum (around 2-5000 Rs).
Pankaj,
I have 26L LTCG on property sold in December 2011. There is property I purchased in March 2010 which is still under construction and possession would be August ’12. My CA told me that I cannot claim exemption on payment made to the builder of around 10L (own contribution) as the booking was done on December 2009.
My queries are: 1) What is considered Booking date or Agreement of Sale between me and builder which is March 2010?
2) Can I claim exemption on 10L (own contribution) starting from Dec ’09?
3) If not, can I make remaining payment of 11L to builder (till possession) and claim the same for exemption? Bank loan is 18L out of which 7L is disbursed already to the builder. In this case 26 – 11 = 15L will be my LTCG. On this amount what options do I have?
a) Can I invest 15L into another property? I own only 1 property which is under construction. If I can, will there be a lock-in period for first property?
b) Or I have to pay 20% tax on 15L and invest in bonds?
Your blog is very informative and helpful for people like us. Thank you very much.
Regards,
Deepak
@Deepak
In order to claim income tax benefit u/s 54/54F, you should get possession of new property within two years from date of sale of old property.
So as per our knowledge, if you get possession of new property and registration done before Dec, 2013, you should be eligible for section 54/54F benefit.
1. Booking or agreement of sale has little value in income computation. Its the actual transfer/sale deed (registration) and possession that matters.
2. Its the total cost mentioned in registered deed that is used in LTCG income tax benefit. It should not be case of worry if payments are done in parts.
3. You should be able to claim tax benefit against full cost of new flat.
4. Income tax benefit for LTCG can only be taken against a single residential house property and not more than one.
My father got a house allotted by Allahabad Awas Vikas Nigam in 1977 and and purchased it at the cost of Rs. 60,000/- and started paying instalments as per terms & conditions. The possession was also given during that time. However sale deed was signed in 1987. My father and mother is no more. I am the sole owner of the house property and got it converted anad mutation done in my name in the records of Awas Vikas Nigam and Nagar Mahapalika after all the formalities. Now I intend to sell the house. The house is expected to fetch approximately Rs. 13,00,000. What will be my LTCG liability?
@V K Srivastava
As Cost inflation index was started in 1981-82, you would need to assume fair market value as on 1st April, 1981 to compute LTCG. We have assumed it as Rs around 70,000.
See LTCG and income tax below:
Purchase Year = 1981-82, Purchase Cost = 70000, Cost Inflation Index (CII) for purchase year = 100
Sale Year = 2011-12, Selling price = 1300000, CII for sale year = 785
Indexed Purchase price = 70000 x (785/100) = 549500
Long term capital gain = 1300000 – 549500 = 750500
Income tax on capital gain = 750500 x 20% = 150100
HI pankaj
can u plz advice ? My grand father has left a property in name of me and my elder brother , we want to sell that proper and buy 3 flats one for me second for my brothe and third for my father? my quest is how can we buy the thrid falt in my fathers name and how much tax we need to pay for that.
@Gautam
You would need to compute long term gains on property sale. This gain would be divided among you and your brother.
If you buy a new flat in your name for value more than your share of gains, you can save income tax on capital gains. Similarly your brother can also save tax by buying a new flat.
Remaining amount from sale consideration can be used to buy flat for your father’s name and there won’t be any income tax on this purchase.
DEAR PANKAJ
DO WE HAVE CAPITAL GAIN TAX ON ENSISTERAL PROPERTY
@Gautam
Yes, capital gain tax is payable for ancestral/inherited properties as well.
HELLO, PANKAJ
i have little confusion that my mother had received gift as a gold in 19-03-2010 from my grand mother at his death which gold she had from last 50 years and that particular gold my mother gifted my wife on 18-09-2010 and my wife is sold that gold immitiately to jeweller. the criteria of the valuation i mentioned below Please told me can i liable to pay income tax if yes, how much tax (capital gain) i m liable to pay.
valuation of gold on 01-04-1981 is as per valuation report is Rs. 2,72,477/-
valuation of gold on 31-03-2010 is as per valuation report is Rs. 26,30,158/-
my wife sold it on 20-09-2010 the total value of gold is Rs. 37,19,153/-
@Juned
Please see computation for gains and income tax below:
Purchase Year = 1981-82, Purchase Cost = 272477, Cost Inflation Index (CII) for purchase year = 100
Sale Year = 2010-11, Selling price = 3719153, CII for sale year = 711
Indexed Purchase price = 272477 x (711/100) = 1937311
Long term capital gain = 3719153 – 1937311 = 1781842
Income tax on capital gain = 1781842 x 20% = 356368.4
THANKS ALOT FOR YOUR CO-OPERATION BUT I STILL CONFUSE & WANT TO TELL U ONE THING THAT AS PER THE INCOME TAX ACT TO HOW TO DETERMINE THE PERIOD OF HOLDINGS, MY WIFE IS THIRD PARTY SO CAN I CALCULATE THE CCI PURCHASE COST OF YEAR 2010-2011 PLEASE TELL YOUR OPINION ON THAT & CLARIFY PLEASE
@Juned
As this is inherited/gifted asset, LTCG computation would be done on actual purchase as done by her grandmother.
thanks pankaj for clarification, now i want to tell to u that can we cover this matter in wealth tax if yes than we save or reduce the tax liability in wealth cum income tax. post your grievence
@Juned
Wealth and income tax are two different taxation and they cannot be clubbed together.
I sold a property and there is capital gain on it. few months ago I had purchased one property in my sons’s name with my funds. Can I use investment in this property (in my son’s name who is a minor) to save long term capital gain tax.
@Pooja
To save income tax on capital gains, new residential house property should be in your name (single or joint).
Hi Pankaj,
Thanks to share good knowledge with us through this blog.
i have one question ?How i can save the Capital gain and how i can reduce it with another investment.
i have one flat ,
Purchase cost= 2350000 on date is 24/07/2009 .
Stamp duty reg is 200000
Now i am going to sell on 4500000 laks this property in Pune Maharashtra.
Please calculate the capital gain and please guide me how to save the capital gain? or may i reinvest in another property for saving capital gain
Thanks in Advance!
@Rahul
If you sell this property before 24-07-2012 (before three years), gains would be counted as short term. In that case whole profit of 19.5 lakh would be added to your taxable income and would be taxed as per slab rates (max 30% rate).
There is no tax benefit/exemption available for short term gains.
Please help me on this,
I have an existing house (20years old) and today i have bought a new one by taking a loan and am also planing to sell the existing one within a period of one year from today can i get capital gain exemption on selling my existing house.
@Ammar
To save income tax on capital gains, you should have bought another residential house property within one year before date of transfer.
So if registered sale deed for old property is done before 28th Feb, 2013, you can claim tax benefits u/s 54.
I had sold my ancestral agricultural land in india & had purchased within 3months new agricultural land in india in the names of my wife by making gift of that amount to her whether exemption under s.54b is allowed to me or not?
@Anish
In order to get tax benefit, new property should be on same person’s name who has got long term gains. Gifting amount to anyone does not remove tax liability.
Hi, I had sold my land on 28-12-2011 in India. Do i need to pay tax for the current year of 2011-2012, Or, is it possible to pay the Tax after april 2012. Please assist on this.
@Raja
If you pay taxes after 31st March, interest penalty may also be payable for late payment.
Hi Pankaj,
We have sold a residential land for around 70L and now from this amount we are planning to buy 2 flats. So, Can i get the tax exemption for both these flats?
@Santosh
You would only be able to claim tax benefit against a single property purchase u/s 54.
Dear Pankaj,
We have an ancestral property( grand father’s), which we are planning to sell, My share along with my mothers comes down to 40 L. I have an educational loan to repayed 10L. My mother being a single parents wants atleast 10L in fd for her future. I am left with remaining 10L, I wish to invest that for a long term use. I was told that huge amount would towards tax. Is there a way I can avoid paying tax, as any amount saved will be useful for our family
@Shri
First you would need to compute long term gains using below 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%
Here purchase year is year in which your grand father bought this property. If it was before 1981, you should assume a fair market value as on 1st April, 1981 as purchase cost and year as 1981-82.
This would give total gains for property, divide this gain among all shareholder to compute gains per holder. Now 20% income tax is payable for each holder.
If you want to save tax fully, you can buy/construct a residential house property for cost more than your share in long term gains or invest gains into capital gains bonds.
In your situation, investing into capital gain bonds for three years would be good option.
Hello Pankaj,
Thanks for your blog. It is very informative. I had a few specific questions:
1. My mom is planning to sell an apartment she purchased back in 1996. The purchase price was 8lacs. If I take an approx index of 800 for 2012-13 (planning sale in april 2012), the cost comes to about 21lacs. She had also spent about 5 lacs on flooring and redesigning the apt in 1996 and then about 8 lacs on furnishing in 2004. Can she show the indexed price of these as cost? She has some receipts but not all.
2. The buyer is planning to pay 70 lacs as registration cost (based on existing guideline value) and then 40 lacs against the furniture and renovation. Does this affect my mom’s tax liability?
3. In case I get bonds for 3 years for the LTCG amount. Would I have to show that amount as income in the year I sell the bonds.
4. Last question, I’ve sent her money for the renovation, furniture etc over the years from UK as gift. Is there any way she can payback that amount to me and reduce her tax liability?
Thanks,
@Siva
1. If additional amount spent was on re-construction/additional construction of apartment (physical changes) then indexed cost can be added to compute LTCG. Receipts for payment to builder/construction material supplier should be there to prove same.
2. LTCG would be computed only on registered deed value. So selling price would be considered as 70 lakh only.
3. Capital gain bond maturity amount would not be taxable fully. Only interest earned would be taxable.
4. There won’t be any tax benefit if gift/loan amount is returned to you by your mother.
Thanks a lot for the response Pankaj. On Question 2, would the remaining 40 lacs be considered regular income for my mom then? OR is that non-taxable if we show it as payment against the furniture etc… the It’s all by check and we want to declare everything.
@Siva
It would be tough to avoid tax on remaining 40 lacs. As amount is large, Income tax department may ask for sources of these funds.
In that case you would need to prove that some asset was sold or something like that.
I would advise you not to take any risk and consult an experienced tax professional or CA in this matter. He may charge you some amount but would suggest you how to show this income.
i had got some amount in a court case as the compromise amount for withdrwing the case whether it is taxable or not?
@Anish
We are not sure about taxablity of compromise amount.