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.
I am a senior citizen and in 1993 i receved in will a house from my sister who unfortunately expired .How ever i got the house registred in name of myself only in 2006 as there was pending court case with the tenent who left it in 2001.My sister had spent around rs 40,000 to get the house and fight the legal case .This old house is now bwing sold at 32 lakhs .in 2012.what will be my tax liabilities please helpmeWill the house be considered in my name from registered will date in 1993 or the date of registration in 2006 for calculating LTCG
@Siddharth
You need to compute long term capital gains on property sale. You should assume actual purchase year and cost as spent by your sister originally.
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%
Hi pankaj,
My grandfather has written a will and as per that my father is the owner of that house after grand father. he passed away 1 and half years back. we did not do the transfer till now.
1. Are we eligible to sell the house now? or should we need to transfer that to my father s name and then only eligible to sell (to avoid short term capital gains)?
Pls guide me..
@Vignesh
As per will, new house would already be your father’s and he can sell it.
However there may be a need to get additional transfer document created from court showing the will.
Short term gains would not apply here. It would be a long term asset. Original cost and year in which property was purchased would be taken for LTCG computation.
thanks pankaj
Dear Mr Batra
Kindly advise: Short Term Capital Gain of 4.6 lakh made on a flat sold within 2.5 years. How to save tax? Flat sold in apr 11. Sudesh
@Sudesh
No way to save tax on short term gains. It would be added to taxable income and taxed as per slab rates.
Hi Pankaj i have sold out my mumbai flate for 33 lack on jan 2012 originaly taken on 2005 for 6 lack and paid 10 lack as home loan dues and remaining 23 lack i am investing in new under constrction flate that i will pay by august 2012
whether i have to pay any tax on it pl suggest
@Suraj
As new flat cost would be more than capital gains earned from old flat sale, there would not be any income tax payable u/s 54.
But make sure possession of new is received before Jan 2014. And if possession is not received before 31st July, 2012, you would need to invest capital gains into capital gain scheme account and pay towards new flat from that account.
Hi pankaj,
I have sold a residential site for Rs,25lakhs last month and planning to purchase a plot for the same value.I have already two houses.Does it atract capital gain tax. Have I to deposit this amount in a capital gain A/C
Please help
Thanks
stephen
@Stephen
There is no income tax benefit on purchase of a plot from capital gains.
Secondly if residential site being sold is not a residential house property (build up house/flat/apartment/floor), you may not even get tax benefit u/s 54F as you already own more than one residential house properties.
My Uncle (aged around 77 years, with no legal heirs/dependents) sold his flat in Delhi in Oct 2009 for Rs.35 Lacs. The Circle Rate Value of that flat at that time was around Rs.10 Lacs.
He has now booked an under construction flat in Ghaziabad in March 2012 for Rs.31 Lacs. The Registry Cost would be around Rs.2 Lacs and add another Rs.2 Lacs to be spent on the house in form of electrical and other fittings and fixtures (thus making it a total of Rs.35 Lacs).
Since the house (1250 sqft, 3BHK) is still under construction, the Registry would be possible only by Nov or Dec 2012.
Will the transaction invite Capital Gain TAx??
If yes, any way to save it ??
Please respond.
Thanks and regards,
Sanjay Kumar.
@Sanjay
I am afraid to say that your uncle may have already lost tax benefit.
As per section 54, he should have got possession of residential property within two years period from sale. Three years period is only applicable for own construction of house.
Moreover, Did he deposited capital gains into capital gain scheme account before 31st July 2010? if not, then his tax benefit applicability is vanished at that time itself u/s 54.
Pankaj,
Had 2 questions:
1. I’m selling a flat for 1 crore, 10 lacs of which is going to be against built-in furniture. Since furniture is not accounted for in capital cost calculation, do I have to pay tax on this 10 lacs as regular income? I do not have receipts for the furniture but can take pictures of apt as proof. The present cost of furniture would be well over 10 lacs.
2. If I plan to invest the capital gains after a year in an apartment, can I invest the cpaital gains in a Fixed Deposit for a year or do I have to open a Capital Gains acct and keep the money in that till it is reinvested?
Thanks!
@Siva
As such furniture cost cannot be added in purchase cost of flat. If the same is also added to selling price (on registration documents), then long term gains would increase.
If this extra 10 lakh is not included in price mentioned on registration documents, then IT department may ask you source of this money. Then you will have to prove that this is consideration amount towards furniture.
If capital gains are not used and possession of new apartment is not received by last date of income tax return filing, then capital gains have to invested into capital gain scheme account.
Say if old flat is sold in April 2012, then you can keep amount in fixed deposits before 31st July 2013. But on 31st July 2013 this amount should be in capital gains scheme account.
Hello Shri Batra Sir,
I purchased a flat in Oct 2005 in Rs.21.91 Lac +stamp & registration Rs.1.36 Lac + Parking Rs.0.13 Lac and sold in April 2011 in Rs.85.00 Lac – Expenses in sell Rs.1.10 Lac. I booked a flat for Rs.48.18 Lac + Service Tax + Stamp & Registration and I have paid Rs.45.81 Lac including service Tax to the builder but the flat is under construction and sale deed to be executed on possession of the flat say by the end of July 2012. The agreement of allotment has been executed in June 2010. What will be Long Term Capital Gain Tax position in the F.Y.2011-2012.How much relief I will get under section 54.
@kaushalak
@Arun
See below computation for LTCG:
Purchase Year = 2005-06, Purchase Cost = 2340000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 8390000, CII for sale year = 785
Indexed Purchase price = 2340000 x (785/497) = 3695976
Long term capital gain = 8390000 – 3695976 = 4694024
Income tax on capital gain = 4694024 x 20% = 938804.8
As cost of new flat is more than long term gains earned, there won’t be any income tax as per section 54.
But please make sure that possession is received before July 2012, else you would have to open capital gains scheme account.
Thanks Mr.Batra but as I have already paid Rs.45.81 Lac to the builder till date. What will be the position of relief under section 54 for the above amount if in any case,I will not receive the possession before July 2012.How much amount to be deposited in capital gain scheme account.
@Arun
If possession is not received before 31st July, opening a capital gain scheme account is must condition for section 54.
You may invest only the unused portion (small notional amount in case fully used) of capital gains into capital gain scheme account.
If my father aged 80 sells his inherited property for 30 lakh and gifts the proceedings to me after after paying the tax which i utilize for payment to a construction linked property at 60 lakh ( i donot have any property in my name) do i attract any taxes .We intend to sale the property in june 2013 and i will get the posessis only in 2015 for my house.Will it be more beneficial for me to first get the gift deed in my name from my father and then sale the house in dec 2013 so that no taxes are paid as per capital gain rule .Will i be able to sell the ancestral house gifted by father in june 2013 before 3 year to avoid capital gain tax.I dont have any house in my name.pl suggest should i transfer the property as gift deed for my new property payment of 60 lakh in dec or should i ask father to sale the house and gift the money to mewhich is more beneficial.pl guide
@Rishabh
If your father has already paid taxes on long term capital gains and he gifts the remaining amount to you, there won’t be any income tax payable from your side on this transaction.
If your father wants to save income tax on capital gains but does not want to buy/construct residential house property himself, he should gift property to your name first. Thus property would be sold by you and gains would be yours. To save income tax on this gains, you need to buy a residential house property and get possession for same before end of two years.
You would be able to sell ancestral house anytime as long term gains would be computed from actual date of purchase (as done by father/grandfather etc.)
hello mr. pankaj i have a question for you my father have a house since 1965 on his own name and currently he sold out it in 12 lac 11 thousand while they purchase it in 1965 in only 700 rupee.so is there any tax payble on it .and if its then how can i aviod it.without investment on property or in bonds
please reply thanks in advance
@Mayank
You need to compute long term gains and income tax using below 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%
As purchase was done before 1981, purchase year would be assumed as 1981-82, cost as fair market value at that time.
To save income tax on this gain, investment in residential house property or capital gain bonds can be done.
I and my brother had a flat in Joint name in Mumbai which was bought in 1995 for Rs.10 lacs and we sold this year for Rs.65 lacs.
I want to know how much will be capital tax and whether we have to buy only residential flat or we can buy any property-land/office.
also, whether we have to buy jointly or can we buy independently
@Mukesh
See long term gains and income tax computation below:
Purchase Year = 1995-96, Purchase Cost = 1000000, Cost Inflation Index (CII) for purchase year = 281
Sale Year = 2011-12, Selling price = 6500000, CII for sale year = 785
Indexed Purchase price = 1000000 x (785/281) = 2793594
Long term capital gain = 6500000 – 2793594 = 3706406
Income tax on capital gain = 3706406 x 20% = 741281.2
As flat was jointly owned by you and your brother, considering equal share of both, each of you would have a long term gains of around 18.54 lakh.
To save income tax on this gain, you can buy/construct a residential house property u/s 54 or invest into capital gain bonds u/s 54EC.
Under section 54, new property has to be residential house property only. If a plot is purchased, house should be constructed on same.
To fully save income tax new property cost must be more than gains (18.54 lakh).
New property can be purchased in joint names or independently. Your share in new purchase should be more than gains to save tax fully.
Thanks for your reply. What type of capital gain bonds are available and what will the minimum period we have to hold and how much interest is available.
After investing for minimum period, can we sell the same and what taxes we have to pay on the amount received.
@Mukesh
Capital gain bonds are available for three year’s investment. It offers 6% annual interest.
NHAI and REC issue such bonds.
After investment period is over, principal amount would be tax free but interest would be taxable like normal bank interest. It would be added to your taxable income and taxed as per slab rates.
Can I buy two residential flats to avail LTCG or buy one flat and balance amount to be invested in bonds.
@Mukesh
You cannot invest into more than one residential flats to avail tax benefits u/s 54/54F.
But investment in capital gain bonds and residential property may be done simultaneously.
If I buy a residential flat, then upto how many period I have to hold it or can I sell as and when I desire.
Will it again be treated long term or short term capital gain.
@Mukesh
You would have to hold new property upto three years.
After three years its sale would again give rise to long term gains.
If I buy a flat for Rs.15 lacs+ Rs. 1 lacs for registeration and then I spend around Rs.10 lacs for renovation, will this expense will be eligible for LTCG.
@Mukesh
If renovation expenses are incurred for structural/construction changes like addition of a new floor, change of map layout, addition of new rooms etc, then it can be included in new property cost.
Hi Pankaj,
My mother has recently sold a flat and has earned a LTCG. In addition to this flat sold in March 2012, there are two residential plots and one flat on her name, and commercial shops too.
My queries are as below:
1. Is she eligible to save the capital gain by investing in some residential house/flat? 2. Is residential plot considered as a residential house?
3. If a residential plot is sold, can the capital gain be exempted from tax in any other way than investing into capital gain bonds?
4. Also, she is planning to sell one of the commercial shop. Is it possible to save LTCG on sale of the shop as well?
Please advise.
Thanks
Rohit
@Rohit
1. Yes, she is eligible to save income tax on capital gains by investing into another residential house property. This is as per section 54. As sold property was residential house property, section 54 would apply and not 54F.
2. Residential plot is not considered as residential house property.
3. If residential plot is sold, either 54F or 54EC can be used to claim tax benefits. 54F is not applicable in case person owns more than one residential house property at the time of sale of plot. Section 54EC can still be used for tax benefits by investing into capital gain bonds.
4. In case of sale of commercial shop also (and all other assets sale other a residential house property like gold, foreign company stocks etc.) , same 54F and 54EC can used.
Thanks for your response Pankaj.
1. Could you please elaborate on “section 54 would apply and not 54F”. Why would section 54F not apply if residential plots are not considered as residential houses? Is it because at the time of sale there were two flats in my mother’s name? (including the one which is sold).
4. If we want to take use of 54F when selling the commercial shop, do we need to make sure that not more than one residential property is in my mother’s name?
Thanks again,
Rohit
@Rohit
1. Section 54 is available for tax benefit only if sold asset is a residential house property else 54F applies.
2. Tax benefit under section 54F won’t be available if person owns more than one residential house properties at the time of sale of asset (commercial shop/residential plot/gold etc).
Thanks Pankaj.
1. Will it be correct to say that if the sold property is a residential flat, then tax can be exempted by investing into other residential house/flat, irrespective of how many residential houses are owned by the person?
When the property is not residential, then section 54 is not applicable but section 54F is.
2. If the residential property is sold in March 2012, how much time is available to invest into other residential property or capital gain bonds?
Thanks
Rohit
@Rohit
1. Yes.
2. Under section 54EC Investment into capital gain bonds can be done within six months of sale. Under section 54 and 54F, if a residential house property is purchased, possession of same should be received within two years from sale (three years in case house is self constructed). if possession is not received before last date of income tax return filing (31st July, 2012), capital gain scheme account needs to be opened and capital gains (or sale consideration amount in case of 54F) has to be invested into this account. This account can be used to pay builder/seller of new identified property.
Thanks a lot Pankaj ji. Have a good evening.
hi mr. pankaj my question is i have a commercial shop or commercial land if i sold after three year can i re purchase commercial shop or commercial land for exemption of capital gain
@Amit
There is no exemption on reinvestment into commercial land or shop.
Hi Pankaj,
I am glad to see this link and I hope to get answers, Thanks in advance.
we have sold a properly (4800 sqft land) in my mother’s name for 66 lakhs in sep 2010 and we have booked a Residential flat in her name worth of 2.38 Cr.
The flat is under construction and we have already pain 66 lakhs towards advance and this amount is now exempt of capital gains under section 54F
Question:
1) Can we sell another property in my mother’s name (may be worth 60 lakhs) and put that in to the same residential house – will that amount will also be exempted from LTCG
2) We sold another property in my dad’s name for 15 Lakhs. There is a provision that we can alter the agreement with the builder and include my dad as a joint owner for the new flat. if we direct this 15 lakhs towards the same flat will this amount be exempted from LTCG tas?
3) In addition if my mother sells her jewels which has been inherited and put that money in the purchase of the new flat along with the amount incurred from the same of the property as well. is this allowed.
3) It is vague at this point whether we will have all the funds in my mom’s name to finalize the purchase of the flat. It will be hard to get loan approved on my mom’s name. If i avail a loan by including my name in the agreement, will there be a problem later for the already exempted capital gain from the property sold?
So my question is more towards, can multiple sale be directed to one purchase of higer value. will both amounts be exempted? also if a join ownership is allowed and each owner can bring in their own capital gains from different sources?
It would be of great help if you could answer my questions.
@Manoj
If at the time of sale of asset (not a residential house property), if a person owns more than one residential house properties than section 54F is not applicable.
Also if possession of new purchased house property is not received before last date of income tax return filing (31st July 2011), a capital gain scheme account must be opened for claiming tax benefit under 54F.
1. She can sell another property and claim tax benefit under section 54F for investment into same residential house. Provided conditions mentioned above are followed.
2. New property can have joint ownership. Keep your father’s share value in new property equal or more than 15 lakh. Similarly keep mother’s share value more than 1.26 crore (60+66 lakh) to make tax zero.
3. There won’t be any issue if you also have share in new property and you get loan for same. You have remaining share value of 97 lakh in your name.
So amount from multiple sales can be combined to purchase a residential house property and claim tax benefits on all capital gains. Multiple people who earned capital gains can join to buy a residential house property to save income tax.
i have sold a site in bangalore to 40 lakhs officially and deposited the same in my SB account at SBM. Now i would like to reinvest the same to buy a flat at Bangalore. Since my wife is a house wife and do not own any property i wish to have the new property registered in her name . The amoung of 40 lakhs is received in my name as DD. I would like to reinves the complete to buy a new flat registerring in my wifes name. Is there is provision for the same.
@Dr.M.Shanthakumar
If you invest into your wife’s name, you may not get tax benefit under section 54/54F.
Hello pankaj ji
if an agricultural land sitates within the 8 kms of any panchayat having a population of more then 10000 or more wether sale of that land would come under LTcapital gain tax or not & what is the procedure to cheque on net about the notified lands not covered under LTcapital gain tax?
@Anish
Your land will not be counted as capital asset if Land is outside the jurisdiction of a municipality area or not even within eight kilometers of municipality area.
You can check same with local municipal office.
Quite insightful write-up..thanks for sharing. Great going..keep it up. Good Luck !!
hi sir, i want to do the real estate business but i dont have exepriences but i intresed to do the bussiness wat i have to do please help me sir…………………
Can I use the sale of proceeds of the ancestral property intended to be gifted to me by my father in june 2012 amount(27 lakh) to repay the loans which i intend to take( thirty lakh) to finance the house .First installment of loan to begin from oct 2012 and complete by dec 2014.The booking letter FOR ALOTTMENT OF newly constructed apartment in march 2012 has been issued in my name and first installment from my savings was made in aug 2012However the house will be completed in 2015 dec and posession in march 2016.I intend to take loan first in oct 2012 and then settle the loan from sale proceeds of ancestral (june2012) house gifted to me however I will have posession of MY NEW apartment in march2016.I DO NOT HAVE ANY PROPERTY IN MY NAME. Booking letter was issued in march 2012 for new apartment costing 50 lakh while i deposited the comittment money FOR THE SAID PROJECT in aug 2011 .I will have posession in march 2016 of new apartment and do i save capital gains tax from sale of gifted property and reinvest that in repayment of loan for which i have taken loan in oct 2012 and psession in march 2016.
@Shiva
There is no tax benefit on paying home loans from long term gains.
But as you are buying a residential house property, you can claim tax benefits under section 54/54F.
Possession for new house should be received before June 2014 in order to get tax benefits.
Sir,
If I invest Rs. 30 LTCC in NHAI/REC bond and withdraw it after the period of 3 years. is the LTCG exempt in the year of withdrawal
@Ankur
If investment in capital gain bonds are done, LTCG would be exempt to allowed extent of investment.
Interest on these bonds would still be taxable under income from other sources as per your slab rates.