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 bought a site in May 2008. Around December 2009, I started construction and completed it around August 2010 and am currently residing in it. I am planning to sell the house. The time from when the land was registered in my name in May 2008 to now is about 32 months. I understand that this won’t count as LTCG. I would be left with little or no profit if it were to be considered as STCG. Can you please advise me the best option in this scenario?
Thanks,
Srini
@Srini
If you sell before completion of 3 years, it will be short term capital gain and there is no provision of saving tax arising due to this transaction.
The whole gain amount will be added to your taxable income and will be taxed as per income tax rate slabs.
Hi Pankaj,
I will be selling my flat that I have in the next 2 months. I have booked another flat last year and I will be getting the possession for it in 2 months. Can I avoid CG is I directly pay the last slab of payment to my new builder after the actual sale date?
Thanks,
Kiran
@Kiran
If the older flat has been kept with you for more than 3 years, capital gains arising from its sale can be exempted under section 54 and 54EC.
Under section 54, you can invest the capital gain amount (computed with indexation) again in buying another house (within a year before selling or within 2 years of transfer) or construct another house within 3 years of sale.
As you already bought a new flat, capital gains from old flat can be used to pay towards new flat, but cost for new flat must be equal or more than capital gain amount. If amount is less, then income tax is payable on rest of the amount.
Hi Pankaj,
Thanks, new flat value is a lot more than the CG from old flat, so that is good. The only confirmation I wanted to get was that the new flat was “booked” around 18 months back, was under construction, and I will get possession this week (one month before the actual transfer of old flat happens – within one year). I am assuming I can avail the benefit by considering the possession date of new flat being within one year.
Second point is, I availed home loan for the new flat and the HFC is paying the builder in installments as the work progresses. Can I use the receipts given by the builder in my name to claim the benefit and repay the HFC so amount? Or would paying directly to the builder only qualify for tax savings on CG.
Thanks once again, your kindness with your help is greatly appreciated
Thanks,
Kiran
@Kiran
Possession date can be counted for computations here.
Yes, you can show payment receipts for payment towards new flat or registration documents on your name, will also do same.
Hi Pankaj,
I had bought a flat in Nov 2004 for Rs. 10 Lakh. In March 2010, I bought another flat for Rs. 45 Lakh ( For new flat , I have paid Rs. 20 Lakh borrowed from a relative & remaining by Bank Loan) In June 2010, I have sold my old flat for Rs . 34 Lakh.
1) What will be Capital Gain Tax on income from sale of flat?
2) From the ammount received from sale of flat, I have used Rs. 9 Lakh to clear loan on old flat & repayed Rs. 20 lakh which I had borrowed for new flat. How much tax should i need to pay as result of these transactions?
Thanks & Regards
Utkarsh
@Utkarsh
1. Computation of capital gains and income tax:
Purchase Year = 2004-05, Purchase Cost = 1000000, Cost Inflation Index (CII) for purchase year = 480
Sale Year = 2010-11, Selling price = 3400000, CII for sale year = 711
Indexed Purchase price = 1000000 x (711/480) = 1481250
Long term capital gain = 3400000 – 1481250 = 1918750
Income tax on capital gain = 1918750 x 20% = 383750
2. As you bought a new flat within one year before sale of old flat for an amount equal or more than the gain, there is no income tax payable on capital gains.
Hi Pankaj,
I have sold an agricultural land recently which was purchased in 2007, I want to know if the proceeds from sale of an agricultural land is used to purchase another agricultural land, do i have to pay tax ?
@Rahul
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. In the above case, there won’t be any income tax liability on sale of land.
But if land falls under urban area, long term capital gain will apply here and a 20% income tax is payable on capital gains with indexation calculations.
To save income tax on same you can buy agricultural land or residential flat.
Part capital gain can be invested in bonds and partly to purchase the new house.
Is it possible to save the tax.Maturity of the bonds will be how much?
@SohanLal
Income tax rules are silent on whether both bonds and new house investment can be used to tax exemption simultaneously.
Silence means approval in tax matters, so you may do so.
But I would advise you to consult any CA or tax professional before doing so.
Bonds have maturity after 3 years.
I purchased a flat in Feb’2008 for Rs.22 lacs and sold for Rs.32 lacs in Oct’2010,I paid for repair and maintenance Rs.5 lacs.How can I save tax ?
@Anita
As you have sold flat before 3 years completion, its a short term capital gain. No income tax exemption is available on this.
Whole capital gain will be added to your taxable income and will be taxed at your slab rate.
Hi! pankaj,
I bought a flat in Gurgaon in joint name of me and my wife, in February’2008 for 22 lacs.I spent about 5 lacs in repairs and modernization.I sold the same flat in October’2010 for 32 lacs and purchased another flat for Rs.44 lacs.My question to you is as follows:
1. hot to save tax, since I have not waited for 3 years.
The flat is jointly in my and my wifes name.Can I get some advantage in tax saving.
3. Can the amount paid by me be for registeration of the newly purchased flat be used for tax saving.
I want to avoid paying TAX.PL advise.
Anita
@Anita
As you have sold flat before 3 years completion, its a short term capital gain. No income tax exemption is available on this.
Whole capital gain will be added to your taxable income and will be taxed at your slab rate.
Under section 80-C, you can get exemption for amount paid towards registration and stamp duty of new flat, but combined maximum limit (including PPF, tax saving mutual funds, EPF, insurance, 5 years fixed deposit etc.) for 80-C is 1 lakh.
My father bought a house for 2.5 lacs in 1992. Now it is being sold for Rs. 27 lacs in March 2011. He is a senior citizen with no income source. May kindly give calculation for the applicable income tax on long term gain and also name of the bonds in which investment can be done to avoid income tax.
@Zakir
Since your father has kept the house for more than three year, its long term capital gain. Income tax on long term capital gains is 20% with indexation.
Capital gain computation:
Purchase Year = 1992-93, Purchase Cost = 250000, Cost inflation index (CII) for purchase year = 223
Sale Year = 2010-11, Selling price = 2700000, CII for sale year = 711
Indexed Purchase price = 250000*(711/223) = 797085
Long term capital gain = 2700000-797085 = 1902915
Income tax on capital gain = 1902915*20% = 380583
To save income tax on this long term gain, one can invest the amount again in buying another house (within a year before selling or within 2 years of selling) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Respected Sir, Iwant to invest in resident area in AHEMDABAD is it right time to invest.
@Sam
We don’t have any knowledge of Ahmadabad property market.
Hi Pankaj Sir,
I had bought a plot 10 years back and now i want to sell it and buy another plot.
My questions are:
1. Is a plot considered as a residential house?
2. Will I be liable for payment of LTCG and is there any way i can aviod this tax liability?
@Saloni
1. Plot cannot be considered as residential house.
2. Since you are selling plot after more than three year of buying, the gain arising from it will be considered as long term capital gain. Income tax on long term capital gains is 20% with indexation.
As per income tax act section 54F, In order to save capital gain earned from selling plot, you will have to purchase a new residential property (1 year before transfer or 2 years after transfer) or get a residential house constructed within 3 years from the date of transfer. The new house cost must be equal or more than sale price of plot. In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
The person can hold only one house property other than the new exempted asset at time of buying new exempted property. Also make sure that you don’t buy any other new house property within 1 year from the date of transfer or constructs a new house property from 3 years from date of transfer other than the exempted asset.
Alternatively, you can also Invest whole sale amount, in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development. But max limit on buying capital gains bond is 50 lacs per year.
thanks for the help…..as i stated earlier, i dont want to invest in a residential property rather i am going to buy a new plot.
Is there no way i can get any tax benefit??
@Saloni
If you buy a new plot and don’t construct any residential house on it in next three years, It won’t be considered for tax exemption.
My wife has a residential plot of land bought 20 years back. She wants to sell the plot. I am constructing a house demolishing my old house. Can the proceeds of land sold by my wife be used for the construction of our house. Will the proceeds of the land sale be exempted from capital gain tax for my wife.
further to my query. The plot is on my wife’s name bought 24 years back. Now I am constructing my house demolishing my old house. Is it permissible for her to claim capital gain exemption, if she gives the money received from selling the plot on her name to me, for the construction of the house on my name.
secondly, I want to give a share by settlement in my property being constructed . Will she be able to claim tax deduction on the rental income of the house after the construction is completed
@Krishnamurthy
She cannot claim exemption if she has not bought/constructed a new house on her name. She should a fully/partial owner of new house. Also the amount spent on new house must be more than sale price of plot.
@Krishnamurthy
For saving income tax arising due to capital gain on selling a residential plot, one has to either buy a new property, construct a new house or invest in capital gain bonds.
In case your wife also has ownership in new house being constructed, then there can be tax exemption for amount used for construction.
Hi Pankaj
I have sold a plot of 30 lacs . I am eligible for ltcg. I have two questions
since it is a plot so do i have to invest only in plot to save capital gain
Do I have to invest only capital gain or whole 30 lacs in buying a new plot/flat
regards
Nitin
@Nitin
Since you sold a plot, income tax exemption on long term gains is applicable under section 54F and 54EC.
As per section 54F, In order to save capital gain earned from selling plot, One can purchase a residential house within two years from the date of sale of the plot or a year before the date of sale of plot. Or a house is constructed within 3 years of selling plot. New investment should be equal or greater than the amount of Net consideration (selling price of plot). Also the person can hold only one house property other than the new exempted asset at time of buying new exempted property.
I purchase a flat in Malad, Mumbai for 7.25 Lacs, in 2000, I will be selling it for 35 Lacs in Mar 2011, I have a hsg loan for a flat i am presently staying in(Malad) of about 33 lacs, Can i save capital gains tax
@Raja
If the new flat (in which you are staying now) have been purchased maximum one year before selling old one, then tax exemption can be taken under Section 54.
Else, you will have to buy a flat from the capital gains to save income tax or invest same into capital gain saving bonds.
Hi Pankaj, I am a Senior Citizen.
I bought a plot of land 14 years back and sold it in Jan 2011. Capital Gains amount is approx 35 Lacs .I own one residential flat already in my name. What options do I have to save the tax of approx Rs.7 Lacs. Can I invest only in bonds or can I invest in a residential property as well?
@Vik
Under section 54F, You can buy another residential property for 35 lacs, in order to save full income tax. This has to be bought within 2 years of sale of plot. Also a new house may be constructed within 3 years from sale of plot.
Under section 54EC, you can also save income tax by investing these 35 lacs in capital gains bonds within 6 months of sale issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
Hello Pankaj
I bought a plot in 1987. But I did not show in IT return then as the value was quite low.
Can I show the purchase of the plot in my IT this year. What is to be done for that.
I am constructing residence cum commercial building else where. Is it ok to show the proceeds of the sale of the plot for the construction of the residence cum commercial building and claim CG exemption.
In case the vacant property prior to construction is to be divided between my wife and children. which is better by making a GIFT or SETTLEMENT. What is the proceedure and which is cost effective.
what is the proceedure for doing the gift or settlement for NRI children and Pan card required for the NRI children
@Jaya
There is no need to show purchase of the plot now.
Under section 54F, you can avoid income tax (arising due to long term capital gains on sale of plot) by investing the sale proceeds into a residential property. In case you are constructing residence cum commercial building, only residential part cost can be considered.
In case you want to gift property to your wife and children, you can get a family settlement deed done. Stamp duty is less in case of family settlement deed as compared to gift deed. But settlement deed can only be executed between the blood relation and Gift Deed may be executed in any one favor.
Not sure about whether PAN card is required or not for children.
I sold residential plot on 23.9.2010. I want to buy a flat being sold by a person. Can I buy a second hand flat ? Can I wait upto 23.9.2012 or 23.9.2013 for the purchase?
I kept the money in a bank SB account. The date of my return filing (salaried persopn) is 31.7.2011. Hence in case I can not purchase by 31.7.2011, can I shift this amount to CGAS 1988 of SBI before 31.7.2011 or before 23.3.2011 (6 months of sale) ?
Can I freely pay the amount to the builder from CGAS or IT AO permission is required for each payment ?
How to close the CGAS account ?
Pl. enlighten.
Prasad, Hyderabad
@Prasad
I am assuming that residential plot sold by you have been kept for atleast 3 years.
To save income tax on long term capital gain (arising due to sale of residential plot), section 54F and 54EC may apply.
Under section 54F, You can buy another residential property between the time frame of one year before sale and after two year of sale. A house may also be constructed within 3 years of sale.
Yes, you can buy a second hand flat too but flat will need to be purchased before 23.9.2012. Or if you are getting a house constructed, that must complete before 23.9.2013.
If gain amount in not used for purchase of another property before the due date of income tax return filing, then the balance unused amount should be deposited in capital gain account scheme in bank. So you may deposit it before 31.7.2011.
Yes, you can pay builder from the CGAS account. AO permission is only required for closure of account and a letter (Form G) is required.
Hi Pankaj,
My Dad and I jointly own an apartment which we purchased at 29 lakhs. The sale agreement with the builder was made in May 2007 (when we paid the amount of 29 lakhs); however the registration and khata certificate was done in April 2009. Which date counts as “purchase” of the apartment?
Also, we now intend to sell this house in which we are currently staying (hopefully for 50 lakhs) and buy another house which will surely cost more than the sale price of the current house (probably 65 lakhs). Assuming the sale of current house happens this May 2011, will our earnings be counted as STCG or LTCG?
As per section 54F, can I avoid paying tax on this since we would be buying a new house in place of the current house? If so, within how much time should we buy the new house? Our new house also would be an apartment; we have no plans of building a house on a piece of land.
Last of all, if we do not manage to buy an apartment within the stipulated time, is there any other mechanism to avoid tax. I read about national highway bonds etc. but not too clear on them.
Looking forward to your reply!
Regards
Galahad
@Galahad
For computation of long term gains, you may consider agreement date as purchase date.
On considering May 2007 as purchase date, already 3 years have passed so sale of house now will be considered as long term capital gain.
To save income tax on gain, Under section 54, you can buy another residential property for amount equal or more than capital gain. But new flat must be bought within next two years of sale.
If you don’t wish to buy flat, Under section 54EC, you may invest into capital gain bonds issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development, within 6 months of sale.
Sir, I have sold the residential property for Rs.20,00,000/- and my capital gain is worked out to be Rs.10.00 lacs. As I am not able to purchase the new property, I invested the whole amount of Rs.10.00 lacs in bank under Capital Gain Account for 5 years. Now my query is>
1. What is the position of Rs.15.00 lacs after completion of 5 years. Should I again invest to capital gain account to save capital gain tax.
2. Should I use the amount freely after 5 years.
@Praveen
In case you are not willing to buy a new property, you should Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development. This is the only way you will able to save tax.
In case you invested into Capital Gains Scheme of Deposit Account, that won’t save tax. This account is for keeping the capital gain amount temporarily until a new house is bought. In case you are not decided about buying new property now but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Hi Pankaj,
My late father had bought a plot on 1989 for Rs.101292. He passed away in 2002 and the plot was transferred to mine and my mother’s name in 2003.We should the plot in March 2010 for 10,10,500.
Q.1. We deposited the money in a joint savings a/c. What are mine and my mother’s tax liability?
Can you please advise!
Thanks,
Nitish
@Nitish
Purchase Year = 1989-90, Purchase Cost = 101292, Cost Inflation index (CII) for purchase year = 172
Sale Year = 2010-11, Selling price = 1010500, CII for sale year = 711
Indexed Purchase price = 101292*(711/172) = 418713
Long term capital gain = 1010500-418713 = 591787
Income tax on capital gain = 591787*20% = 118357.4
Income tax and capital gains will have to divided among all owners in same proportion as property is.
Sir, I bought a plot on my name in 1999 and now I have planned to sell the same. I wants to buy another plot and construct a house also with in one year. My queries are
Q1. I am planning to buy the new plot but on my wifes name , will this attract Long term capital gain or not. or it should be on my name only ?
Q2. The money I will be receiving should be taken in cash or through bank. If through bank can that be kept in saving or some other account (I will buy new plot with in 15 days of selling old plot) .
Q3. If I buy new plot and construct with in one year, do I have to fill any type of IT documents/ forms.
I shall be great full to have the answers
@Sushil
1. In case you want to save income tax on capital gains, you should be owner of new house (fully or partial). You can become joint owner with your wife for new house. But your share cost must be more than selling price of old plot, in order to make income tax zero.
2. As you are buying a new plot within 15 days, you can keep amount in any bank account.
3. To save income tax arising due to sale of old plot, a new house must be constructed within three years of sale of old plot. There is no extra IT documents needs to be filled.
Hi , Pankaj
We are willing to sell one of our residential property ….
we just wanted to know that the Long term capital gain amount can only be invested in another residential or even LTCG amt can be invested in commercial property also
thanks and regards
@ABN
To save income tax arising from capital gains, investments has to be made only in residential property (Section 54 and 54F( or capital gain bonds (section 54EC).
Hi Pankaj,
A relative of mine has sold a piece of land in year 2010-11 which was purchased in 1995-6. But they also spent some amount in upgradation of their existing house in this year(2010-11). My question is that is it possible to write off the amount spent on upgrading existing house against capital gains from sale of land?
Thanks.
@PJ
To save income tax on capital gains arising from sale of a plot, a new house must be constructed withing three years of sale, or a new flat to be bought within two years, or all sale proceeds to be invested into capital gain bonds.
Renovation is existing house cannot be considered for same.
Dear Pankaj,
I have sold one of my flat and got it regd. in June 2010. Should the amount be invested in Capital Gains account (savings bank in nationalised bank) before 31st march to avoid tax or should I have to buy a property before 31st March 2011.
This is my second flat which was purchased six years ago. I am currently staying in my own flat in a city.
(1) please clarify whether the amount should be invested before 31st March.
(2) whether it can be kept invested in mutual funds?
(3) whether bank account should be opened and money to be transferred before 31st March 2011.
@Kanth
You can buy property within two years after the sale of old flat.
In the meantime, you should invest capital gains into Capital gains savings account before filing of income tax return (before 31st July, 2011)