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,
I did aggrement of my home for under-construction property in April 2008 while contruction were going on , where as we got O.C for the same property in 2010.
I am selling my home in May 2012, while calculating capital gain, should i calculate it as a short term capital gain or long term capital gain?
@Akash
It would be a short term gain as three years have not finished yet after taking possession.
dear pankaj,
I have just one question, if MR.B owns 2 flats, 1 shop, 1 agricultural land.
He sales agriculture land, shop and keeps the money in capital gain account.
Below are 3 cases, want to know how to overcome the problem.
Case 1 – He is planning to buy a new flat for which he will be selling one of his 1 flat also.
Case 2 – If he doesnt sale any of his 2 flats owned is he applicable to save income tax by buying new property.
Case 3 – If he wants to pay income tax on capital gain , how he can transfer the money as it is blocked in Capital gain account.
Appreciate your answer in simple words and in case wise format… 🙂
@Sam
If at the time of sale of agricultural land and shop, he owned more than one residential properties, he won’t be eligible for tax benefit u/s 54F.
If he sells out one flat before sale of these, 54F would be applicable.
For closing capital gains account, he would need clearance from assessing officer. After getting permission from AO, he can withdraw amount and pay taxes.
dear pankaj,
Will appreciate if you can help me with the following question:
Q1.If the person was a salaried retired person with total income 25 lakh for his 20 years service of which assuming he spends 10 lakh for his/ family expense ,suppose he owns a balance sheet of 30 lakh and was having a agricultural income which he never declared in income tax returns. In such case will the agricultural income can be consider as source of money for buying properties which he own of 30 lakh.
Q2. Suppose a women balance sheet is 40 lakh assuming all her expenses where taken care by her husband. Assuming she had 2 shop, 1 flat for which she had a rent income as total 25 lakh till date and 15 lakh as agricultural income ( assuming 10 years as a period). Women havent filled income tax till date, will like to know in such case what wil be penalty / income tax she needs to pay till date…
@Sam
We don’t take such professional cases. This forum is only for helping common people with simple queries.
Dear Pankaj Ji,
I purchased flat in May 2005 & sold in Aug 2012, so it falls under LTCG. I purchased another new under construction flat in June 2010 (registration done) & possession is not done yet . Can i claim LTCG adjustments in this scenario ?
Many thanks in advance fr ur advice n time
Regards
V.Shah
@V Shah
If you get possession for the new flat before Aug 2014, you may take tax benefit for new property purchase.
Hi Pankaj,
To avoid short term capital gain, i m investing in two underconstruction properties , can i show stamp duty & registration amount also as investment , what else i can show as a investment other than capital saving bond.
@Akash
There is no way to save income tax on short term gains.
I have constructed a house in the year 1993. Further I have purchased a flat in the year1999 and sold this flat in Sept 2011. Now Iwould like to purchase house property for exemption on capital gain Tax. Please tell me the time limit purchase/construction of new property.
@L.Bhasskara
In order to save income tax on capital gains from flat sold in Sept 2011, possession for new residential property must be taken before Sept 2013. In case construction is getting done yourself, it should be completed by Sept 2014.
Hi Pankaj,
I obrought house in 2010 for 13,00,000 ( excluding stamp duty ) and selling it now in 2012 for 30,00,00 and using same money I am buying a new home for 42,00,000 , how can i save my shortterm capital gain?
@Santosh
There is no way to save income tax on short term capital gains.
17 lakh (minus stamp duty charges for purchase) would be added to your taxable income and taxed as per your slab rates.
If I received money as a result of sale of plot from my father, how can I sve income tax on this capital gain? if i purchase agricultural land Is it useful to save tax?
@S C Chaudhari
Income tax would be payable on long term gains to the seller. If plot was on your father’s name, he would need to pay taxes. Tax saving would be applicable if he invests into another residential house property.
There won’t be any tax benefit on purchase of agricultural property if sold property is not agricultural.
Hi sir please help me out regarding this
The land belongs to ” X ” and he has entered into an agreement with ”Y”(who is a builder)
the contract is to construct the apartments and give 41% of apartments to me and he must take over 59% of apartments and for this a power of attorney is executed and as per income tax provision and a case law of Jabasir singh sarkaria (2007) (AAR) its held that tax need to be paid the moment power of attorney is executed and to avoid such tax in power of attorney a clause need to be made stating that the power is given to builder only on completion and not otherwise
My question is to know tax planning of 59% i.e.., can X transfer it to his wife or daughter and claim exemption and how can i make the documents so has to give right on the property only after completion of the project and not otherwise
Need a urgent reply
Dear Pankaj,
My parents bought a plot of land in 1992 from a land developer. They paid the entire consideration in 1992 and received receipts for the same. The plot was, however, registered in their name via a registered agreement after payment of stamp duty in the year 2001. Now they intend to sell it.
1. For calculating LTCG what would be considered to be the year of purchase, 1992 when the plot was bought from the developer or 2001 when the plot was registered.
2. My mother does not have any income. So, she does not file returns. However, this year she will have income in the form of LTCG from the above sell. Could you tell me the total income tax that she will have to pay. Will it be (LTCG-Basic Exemption) * 20%
Regards
@Suresh
1. In case they got possession of plot in 1992 (possession/handover letter would be needed), then LTCG can be computed with purchase year as 1992.
2. If there is no other income, LTCG would be reduced by basic exemption and then taxable at 20% rate.
hello sir, i have one query…i sold my house on aug 2011 at aprice of 27 lacs which was purchased on 2004, of 6.5 lacs,accrding to inflation index and all calculation my profirt goes to 16 lacs nearly….i paid a advance tax of 3 lacs on 15 march 2012, till todays date i havn’t file the IT return. but now i seen a property of 32 lacs with 50% partnership with my cousin so my side have to pay 16 lacs…..so can i get the refund….if yes than how much i can get.the tax benefit…and for full benefit of ltcg can i increase the agreement value or partnership percentage of my side n compensate..eagerly waiting for your reply…thanks.
@Dr Pravin Patel
As your share in new property price is equal or more than long term gain, there won’t be any income tax payable on long term gains.
You can file income tax return and ask for refund of 3 lacs after claiming deduction u/s 54.
Make sure either you get possession of house before 31st July, 2012 or open a capital gain scheme account before that.
I am an Over Seas resident of India and a Malaysian Citizen.
I am receiving rs 100 lakhs as compensation for surrender of tenancy.
I want to use Sec 54 F to reinvest full proceeds and pay no tax.
Will there be a problem.
@Zorba
I think, the amount received on surrender of tenancy is a capital receipt and section 54F for capital gains can be applied to it.
I have 4 acres land, I had bought this at 1.2 lacs 15 years back and today the selling price is 48 lacs for 4 acres. If I sell this will I have to pay any income tax, I am a retired person, Is there any way to avoid capital gains tax if applicable?
@Girdhar
You will have to pay 20% income tax on long term gains.
You need to compute long term gains from following 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%
You can save income tax on this gains by investing into residential house property u/s 54F or into capital gain bonds u/s 54EC.
Dear Pankaj Ji, I request for your advice.
My daughter purchased a plot in FY 96-97,which she sold in FY 11-12 at much lower prevailing price than the circle rate. The plot is in unapproved area and the practice of sale/purchase is power of attorney. To save tax on LTCG, U/s 54F she would utilize the whole consideration amount (sale proceeds) in construction of a new house, for which she has already paid part payment to the developer for a plot and the balance deposited in Capital gain account(before filing of return). My question is for the sold plot does she need a valuation report from Govt. Regd. valuer and your good advice on the sale lower than the circle rate.
@Pal
Long term gains should be calculated as per circle rate in case selling price is lower than that.
An Excellant source of information on financial matters which is hard to match by others.
Please advise also other legal option based on actual sale price.
My father died in 1996. He has 8 children (2 boys, both married;4 married daughters and two unmarried daughters). We are in the process of selling his urban land with the house he built in Hyderabad which he purchased in 1953. How does one calculate the capital gains tax for each child? Please reply to email address.
@KGP
You need to compute long term gains 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%
Here purchase year would be same as in which your father acquired the properties. After computing long term gains, if each children has equal share in properties, each of you would have S/8 gains.
Dear Mr. Batra
Thanks for clarifying.
K G Prasad
Dear Pankajji,
I have sold a flat in Jan 2012 for 28 lakhs which was purchased in Jan 2004 for 6.75 lakhs. To avoid the tax on capital gains, how much i should invest in new property? and what will be the last date for this investment?
Thanks in advance,
Raja
@Raja
See below computation:
Purchase Year = 2003-04, Purchase Cost = 675000, Cost Inflation Index (CII) for purchase year = 463
Sale Year = 2011-12, Selling price = 2800000, CII for sale year = 785
Indexed Purchase price = 675000 x (785/463) = 1144438
Long term capital gain = 2800000 – 1144438 = 1655562
Income tax on capital gain = 1655562 x 20% = 331112.4
If you buy/construct another residential house property with cost more than long term gains (16.6 lakh), then there won’t be any income tax payable u/s 54.
You need to buy new house property within two years from sale of old flat (by Jan 2014 you should get possession). In case you construct house, it should be completed within three years (Jan 2015).
If possession of new property is not received before 31st July 2012 (last date of return filing), you must open capital gain scheme account and deposit long term gains amount there. Payment for new property should be paid from this account afterwords.
Thanks Pankaj. I am very grateful for your detailed help.
Dear Sir,
I booked a flat with a builder in 2006 and paid 1650000 to him till 2011 ( 950000 HDFC loan and 700000 self) . The builder could not hand over the possession and i sold the flat before taking possession in 2011 – april at the same price 1650000. I paid 350000 rs. interest to HDFC during this period. Can i claim long term capital loss of 350000 now. Please advice.
@Gaurav
There is no deduction available for interest paid on home loan for house whom possession is not taken.
Interest paid cannot be added to capital loss.
Sir,
but can indexation be applied to get long term capital loss.
@Gaurav
Home loan interest cannot be included in asset cost.
Moreover as possession was never delivered to you, officially it does not become a capital asset. Hence long term gains rules does not applies here.
so what kind of loss or gain is this . is it a short term capital loss. what is the nature of transaction ?
@Gaurav
As flat was sold at same price you paid to builder, its neither a gain or a loss.
Regarding home loan interest, You took a loan and paid interest for same. It cannot be treated as loss.
what would have been the case if i would have sold it at higher price.
@Gaurav
Then it would have been a capital gain. You would have to pay income tax on differential amount as per your slab rates.
so right now in the income tax return i just have to declare the buy and sell amount without any loss.
@Gaurav
As there is no gain/loss, Its not mandatory to declare it in ITR.
thanks a lot pankaj ji
Dear Sir,
i read on the net that you hold ‘right to acquire the property’ which is under construction and sell of the right after 3 years also comes under long term capital gain or loss consideration.
http://taxguru.in/income-tax/taxability-capital-gain-sale-construction-property-nature-gain-date-indexation-availability-benefit-section-54-54ec.html
but in your opinion their is no loss or gain. i am confused now. please clarify.
@Gaurav
As per exact income tax laws, in case possession is not taken or registration is not done, asset is not yours. When asset is not yours there is no question of gain/loss on capital asset.
However there have been cases in which assessee have fought their cases in court against income tax department and won. Some of these have flat allotment done but possession was never/late delivered because of circumstances out of their control.
sir please refer following links
http://taxworry.com/capital-gains-selling-a-booked-flat-before-possession/comment-page-1/#comment-3295
http://taxworry.com/can-date-of-sale-agreement-be-taken-as-the-date-of-purchase-of-right-in-a-flat/
http://taxworry.com/flat-allotment-date-is-crucial-for-the-capital-gains-itat/
these links even recommends to sell the flat before possession in order to get LTCG benefit.
@Gaurav
If you want to claim this, you can do. But be prepared if income tax department calls for scrutiny.
Anyways, maximum you can do is to declare it as as long term capital loss (with indexation computation). This can be either carried forward to next year or set off against any long-term capital gain.
yes that is what other sites are also suggesting but all are silent about the interest component . do i need to add yearly paid interest in the yearly paid cost to get the total yearly cost and then index it. Your help is needed in this regard.
@Gaurav
I have informed you n times in earlier replies, home loan interest cannot be added to house purchase cost.
but sir this is not home ….this is ‘right’ and interest is the additional cost to acquire\maintain that right. I never claimed any benefit on the interest paid to the bank.