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:
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 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.
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Hi Pankaj ji,
I have taken a hsg loan on of Rs. 40 Lac in jan'2010 to construct a house. Till today last disbrushment yet to be made. This year july 2011 I sold a property of Rs. 52 lac & want to repay the hsg loan. is long term gain is applicable to me or is there any way to avoid it.
Thanks in advance.
Regards
Kanhu
@Kanhu
First, In case sold property has not been kept for three years, it will be a short term gain. Whole gain would be added to your taxable income and taxed as per your slab rates. No exemption will be available for that.
In case, its a long term gain, read further.
For computation of long term gains on sold property, purchase cost and year would also be needed.
You can use below computation to know LTCG and income tax:
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%
In order to avoid this income tax, one can buy another residential property u/s 54. Possession and registration of your new house should by done within two years from sale of old property.
In order to save tax fully, new house cost must be more than long term capital gain computed above. if new house is not handed over before income tax filing of FY in which old property is sold, gains should be invested into capital gain scheme account in nationalized bank.
dear pankaj sir,
i had written to u earlier also, and you had calculated that my mother was required to pay tax on capital gain amounting to 20% of Rs.11,71,054/-. (the amount that remained after investment in land and construction thereafter)
Sir, as it is not permitted by law for my mother invest in more than one property , i wanted to know whether she can transfer the remaining amount ie. Rs.11,71,054/- to me as my share of property, so that we can save on tax by investing in another plot of land by buying the same in my name.
thank you in advance.
@Nilesh
She would to pay tax first on capital gain and then she can transfer the amount to you.
If you want to be considered as share holder of property, it had to be done before selling property. She could have done a gift deed before selling making you joint owner and then in that case you could have also invested to save LTCG.
But now as property is already sold on her name, she would have to pay tax or invest u/s 54 or 54EC.
Hi Pankaj,
My father bought a small house in 1992 valued Rs 41,000. In 2003 he started to expand it and spent Rs 900,000 into it. Last year my father was died and now we have to sell the property for Rs 1,600,000.
1. Will it be treated as short term or long term property?
2. Please advice what should be the tax implication for this scenario.
@Babai
As per below computation, this is actually a long term capital loss and not a gain.
Purchase Year = 1992-93, Purchase Cost = 41000, Cost Inflation Index (CII) for purchase year = 223
Construction Year = 2003-04, Construction Cost = 900000, Cost Inflation Index (CII) for Construction year = 463
Sale Year = 2011-12, Selling price = 1600000, CII for sale year = 785
Indexed Purchase/Construction Cost = 41000 x (785/223) + 900000 x (785/463) = 1670245
Long term capital gain = 1600000 - 1670245 = -70245
Hi Pankajji,
We are 4 brothers.
My Father purchase a land for Rs. 50,000 in 1975. Then developed a Movie Theater around 1980.
Now the said perperty is got transfer to us (to 4 brothers) and planning to sell for approx. Rs.20 Lac.
In near future as a share I will received Rs.5 Lac will be considerd as Capital Gain?
I want to purchase a plot in share with 1 of my brother (<=50% share). So now, do need to pay tax on Rs. 5 lac
1) If YES then how much
2) If NO then how much excempted under which section / rule?
Thanks in advanced.
Regards
@Mr Email Online
First you would have to compute LTCG with 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%
As CII was started from 1981, you will have to consider a fair market value as on April, 1981 as purchase cost.
Each one of you will have to pay 20% income tax on your share of LTCG.
In order to save tax fully, you can either buy a residential property from your share of sale consideration (5 lacs) u/s 54F or invest into capital gains bonds u/s 54EC.
There is no benefit available if a plot is bought, unless a house is constructed on it within three years of sale.
You can buy/construct a property in joint ownership, but cost of your share should be equal or more than sale consideration, to save tax fully.
hello Pankaj ji,
thankyou for all the answers you have provided to other readers. They in themselves were very helpful. I too have a query to add to this list.
I have just received a cheque of 72Lacs on 6/8/2011, as sale proceeds.Its the sale of non-residential property. My plan is to first deposit the whole amt. in my ICICI bk. a/c. Then use 50L out of it to buy REC Bonds. Remaining 22L I plan to shift to CGAS in the month of Feb.2012. Is it permissible? I understand that my two year time period to buy another property starts from 6/8/2011.
@Rajiv
There has been confusion whether you can save tax by using both 54F and 54EC at the same time. Tax laws does not have clear mention of same,
So I would advise you to consult a experienced CA/Tax professional before choosing these options.
Investment in capital gain bonds must be done within six months of sale. And deposit to CGAS has to be done before filing income tax return for sale financial year.
And as per 54F, time period to buy new residential property is two years from date of sale of property. If a house is constructed, this limit is three years.
thankyou for the reply. the opinion i got from practicing tax consultant is, its permissible to opt for both schems, namely CG Bonds and CGAS together but one has to comply with the time constraints given in the respective sections., namely 54EC and 54F(in my case). hope this may be of some use to other readers who are in similar situation.
Dear Pankaj ji,
I have a flat (jointly hold with my wife) in Nasik. I want to sell it off and want to buy a flat in Pune. We want to save capital gain tax by investing the exact amount of capital gain in a new flat - which my son is going to purchase in Pune . That flat will be jointly hold by my son, my wife and myself. My questions are :
1) Will my son be eligible for bank loan for paying out the remaining amount purchase value ?
2) Will our capital gain amount be exempted from Income tax in this case ?
Please reply to it at your earliest.
K.Ghosh
@K.K.Ghosh
1. Your son would be eligible to get home loan for his part of flat cost.
2. No income tax would be payable on capital gains incurred if your and your wife's share cost in new property exceeds your individual long term capital gains.
Hi,
I have a quick query. This rule about transferring the capital asset in a non residential form to residential form also apply if I sell my land and use that to close my home loan?
@Mukund
There is no benefit available for paying home loan from long term capital gains.
Dear Sir,
My father bought a flat at 3.5 Lac in Jun 2005 and sold the same at 20 Lac in July 2011. I understand the capital gain is approx. 14.5 Lac and hence the capital gain tax would be 2.9 Lac. From this money, my father is helping me buy a house valued 31.2 Lac. I am taking a loan of 25 Lac. In order to save capital gain tax, I am thinking to go for one of the following options, however I have a question associated with each of this option.
1) As of now, I and my wife (housewife) has applied for Loan of 24.8 Lac and the same is sanctioned. The sale agreement is made as of now on the name of me and my wife. However, if I and my father (instead of my wife) buy property (31.2 L)jointly then he is investing more then capital gain (14.5 L). As per builder, i and my father will have to apply for loan jointly. However, in this case am i still eligible for 24.8 Lac loan (80% of 31.2 Lac)?
2) Is it possible that my father get added as joint property holder in addition to me and my wife and hence he can save capital gain tax on approx 10 Lac (33% of my property value)? Can the rest of the capital gain be saved under capital gain bonds?
3) My father invest capital gain (14.5L) in capital gain bond. What is approx. interest rate and locking period for the same.
According to you, which is the better option.
@NP
1. In order to save income tax fully on capital gains, your father has to buy a residential property (jointly or singly owned) for more than 14.5 lacs. You can apply for joint loan with your father and keep ownership cost in new property for your father more than 14.5 lacs. But in case of a joint loan, financial checks will be done for both applicants (your father too) and loan disbursement may suffer.
2. You can buy new property in joint names of you, your father and your wife. Your father will get tax benefit for his share in cost. He may buy capital gain bonds for remaining amount to tax exemption.
3. Interest rate is 6% (taxable) for capital gain bonds and lock-in period is three years.
Thanks a lot for your point wise reply.
Respected Sir,
My Fore Father's Land/plot (N.A) is Sold after many years When It Was Bought . Approx in 1945 around it was being purchased....so after Indexing with current year of 2011..."Obviously" it would not help us in Saving Long Term Capital Gain tax of 20% ...its a HUF property...
I Dont Want To BUY any REC/NHAI Bonds Just to Save Tax...But Need Better Option to save tax Amounting To Rs 1crore 11 lacs 80 thousand Rupees !!! It Was Sold @ 5crore 59Lacs. (So 20% of It I am Liable to Pay Tax!!!)
Is Their Any Option to Save this LTCG of 20% !!!???
One Friend of mine told me that if u buy Land/plot (N.A.) in "R1 Zone" within this current year...u will be getting benefitts of saving LTCG of 20%....is it true?
I am also "Farmer" so can i Buy Land (Agricultural) Of the amount in which i m liable to pay tax & the other amount i will be investing in Land (N.A) ???
Pls Guide Me Sir :) Thanks in Advance !!!
And i know Tht Just For Saving Tax investing in Bonds of Govt. Is "Fooling public" because it gives only 6% returns...
@Smit
Case A: Old property was agricultural and it was out of municipal area. No income tax would be payable as property won't be considered as capital assets.
Case B: Old property was agricultural, but lies under a municipal limits, 20% income tax would be payable on long term gains.
Case C: Old property was not agricultural and no construction has been done on that. 20% income tax would be payable on long term gains.
Case D: Old property was residential land and some house construction has been done on that. 20% income tax would be payable on long term gains.
In case D, income tax can be saved fully by investing only the gains part into a new residential house property u/s 54.
In case B and C, income tax can be saved fully by investing whole sale consideration into a new residential house property u/s 54F.
In case B, income tax can be saved fully by investing only the gains part into an agricultural land u/s 54B.
Ca
Hello Pankaj
We bought an apartment in May 2008 for 43L. We are now planning to sell it for 56L. We would be buying a new apartment but the cost is yet not fixed.
Do we fall in long term gain or short term gains? Will there be any tax liability?
Regards
Akash
@Akash
As house is being sold after three years, it will be candidate for long term gain/loss.
Actually as per below computations, its a capital loss and not the gain, so no question on any income tax arise.
Purchase Year = 2008-09
Purchase Cost = 4300000
Cost Inflation Index (CII) for purchase year = 582
Sale Year = 2011-12
Selling price = 5600000
CII for sale year = 785
Indexed Purchase price = 4300000 x (785/582) = 5799828
Long term capital gain = 5600000 - 5799828 = -199828