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.
This is a factual account. Every date and quote below is from written correspondence I…
Every year around July–August, the same ritual: open the Income Tax Department's offline ITR utility…
In my previous update on cross-border investing, I broke down how I secured a zero…
In my last finance update, I documented the exact timeline of executing my very first…
Introduction: Most bank customers accept a credit card rejection as "final." But what happens when…
After spending quite a few days researching platforms and figuring out the best way to…
View Comments
Thanks For advice
if i have to get money from selling a plot ,can i buy a argriculture land , will it save on my LTCG . if the cost of the land is more than what i have got from selling the plot ? i do not have any house on my name , can i bulit a farm house on the argriculture land i buy , will it save my income tax , as i plan to stay there eventually. thank you
@Archana
Buying an agricultural land won't help you in saving income tax.
But if you convert it to residential plot and construct a house on it, benefit can be taken under section 54F. It has to be done within three years of old sale.
To save tax fully, new land + construction cost should be more than selling price of old plot.
Dear Pankaj,
I had bought a flat in 2005 @ Rs. 10.50 lacs with a housing loan of Rs. 8.25 lacs then. Now I plan to sell it at estimated market value of Rs. 45 Lacs.
Can I deduct principal outstanding of housing loan (Presently approx. Rs. 6.5 Lacs) against this property to arrive at the capital gains figure ? i.e. 45-10.5-6.5 = 32 Lacs.
I plan to re-invest the gains whatsoever to buy new property within a year to save on LTCG Tax. Please advise.
Thanks in advance.
Just a small correction in my above query i.e. 45-10.5-6.5 = 28 Lacs.
@Pramod
You cannot deduct outstanding principal amount from capital gains.
Below is the computation for LTCG:
Purchase Year = 2005-06, Purchase Cost = 1050000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 4500000, CII for sale year = 785
Indexed Purchase price = 1050000 x (785/497) = 1658451
Long term capital gain = 4500000 - 1658451 = 2841549
Income tax on capital gain = 2841549 x 20% = 568309.8
If you buy a new residential house property within two years of sale, for cost more than 28.5 lakh (LTCG), there won't be any income tax payable u/s 54.
Dear Pankaj,
Thanks for your prompt and a satisfying reply for my query dtd. 4th Oct 2011.
Just need one clarification - So does that mean that I can invest the cost amount of property with inflation index (Rs. 16.58 Lacs) elsewhere? In that case, if I am buying another house of approx. 40 Lacs, I can make down payment of Rs. 28.41 Lacs to save on LTCG Tax & rest I can take a fresh home loan?
@Pramod
If you buy a new house for price more than 28.41 lakh, income tax on capital gains would be saved. It won't matter if you take loan or not.
Dear Sir
My Amount as per AGREEMENT FOR SALE is say rupees X. And the amount of registration of property as per Circle Rates is Y. Here Y is less than X. Can I show the document "Agreement for sale " for the purpose of LTCG. Is agreement for sale is legal document? What happens if I show higher amount of LTCG as per calculations based on the amount of agreement for sale.? and also what implications I have to face , if I show the amount of LTCG based on the sale amount of Circle rates?
@Chawla Savi
Registration document will be valid for LTCG computation and not sale agreement.
Circle rate or actual selling price, whichever is higher should be considered for computing LTCG.
Dear Batraji
The purchaser is reluctant to get the house registered at actual sale price as he wants to save on stamp duty amount.He the purchaser ready to give in writing on plan paper that he has paid so and so amount,Can I compute the LTCG on the basis of his statement on plain paper that he has paid such an amount.
@Chawla
Stamp duty cannot be saved by registering property for less amount than circle rates, As stamp duty is charged on circle rate and actual sale price, whichever is greater.
LTCG cannot be computed on basis of a plain paper statement of payment.
if we have sold our residential property and out of that capital gain we will purchase residentail propert and Commercial property , then what is the implication of tax ? can we have to pay LTCG on Purchase of Commercial Property /
@Pankaj
There is no tax benefit available on buying a commercial property from gains. Its only available for buying a residential house property or capital gain bonds.
Dear Mr Pankaj.
What will be the effect of DTC for selling an old house property and buying a new one?
@B Mohan
If cost of the new house will be more than gains computed with indexation benefit, there won't be any income tax on gains.
After direct tax code, there will be some changes in how capital gains are computed, base date of acquisition will be changed to 1st April, 2000 from 1st April, 1981.
My grandparents had a building built which has passed on to their children and us. I am one of the legal heirs of the property with my brother as my mom has passed away.Now we plan to sell the property to a builder but keep a owners building for all legal heirs with a flat each. But I donot have a flat in the old building. I have been told that if I had one I would save on long term capital gain tax on the new flat and money from sale. My elder brother who has a flat in old building will apparently not have to pay it. Is this true?
@Parag
Even if you did not own a flat in old building, you had a share in the property as a legal heir.
Long term capital gains would come up if your share in property is sold and you will need to compute the LTCG by indexation rules. After this if a new residential property is purchased by you from this gains, you would be able to save income tax.
Dear Pankaj,
Thanks for the valuable information you have shared. Please help with this:
We have sold a residential property under my mom's name in this month. Can she gift the money received from the sale to me to avoid capital gains tax? The plan is to buy a new home on my name at a later time and avail a bank loan.
@Praveen
Your mother cannot gift long term gains to you to avoid income tax. First she would need to pay income tax on LTCG and then she can gift it to you.
To save income tax on LTCG, a new residential property should be purchased in her name (single or jointly owned) u/s 54. She may also deposit capital gains into capital gain bonds to save income tax u/s 54EC.
Thanks Pankaj. Just looking for this clarity - Should the reinvestment amount be the capital gain or the total amount for which it was sold. For example, bought for 9 lacs and sold for 20 lacs. Should we show reinvestment of just 11 lacs or the entire 20 lacs to claim benefit?
@Praveen
If sold asset is a residential house property, section 54 applies and only capital gain amount has to be reinvested.
But in case asset is any other (plot, commercial property, gold, unlisted stocks etc), section 54F applies and whole sale consideration has to be reinvested.
Capital gains amount has to be computed with indexation benefit only (which will come less than normal calculation of sale price - purchase price).
Thanks but i know I am to pay.
My doubt is will my bro save on ltcg tax becoz he has a flat in his name.
Also I have a commercial clinic in the same building so will I have to pay ltcg tax separately for clinic and for property. I will get a clinic and a flat in new building. Thx for prompt reply.
@Parag
Income tax on LTCG could be saved by reinvesting into a new residential property.
Both you and your brother will have LTCG on your share in property (either commercial or residential). As in turn you will be getting property in new building, You could save income tax on gains.