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.
Dear Pankajji, thank you for your expert advice to people for better understanding of IT rules with regard to Capital Gains. In my case I am planning to sell off a vacant residential plot allotted by Co-op Society on 26.11.95 and registered on 05.08.05. I have paid a sum of Rs.53332/- over a period of 10 years. The sale price would be Rs.13 lacs. What would be LTCG on the deal. I have booked a flat for Rs.65.00 lacs and the construction would be by June 2013. Presently I am residing in my own flat at Delhi and and planning to sell for Rs.50 lacs. Kindly let me know both the sale proceeds invested in a flat booked which is under construction qualifies from IT.
the newly booked flat is registered in my name alongwith my wife,& daughter because of my age criteria. Pl advice
@Diwaker
Below is an indicative computation for LTCG calculations (CII for 2011-12 has not been declared so assumed as 800):
Purchase Year = 2005-06
Purchase Cost = 53332
Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12
Selling price = 1300000
CII for sale year = 800
Indexed Purchase price = 53332 x (800/497) = 85846
Long term capital gain = 1300000 – 85846 = 1214154
Income tax on capital gain = 1214154 x 20% = 242830.8
Under section 54F, To save this income tax, you will have to buy a residential property for 13 lacs (your share) or more within two years of sale. As you already bought a flat for 65 lacs, you can avail tax exemption but possession and registration of flat must be done before completion of two years from sale. But there is a condition for exemption that you should not own more than one residential property at the time of buying new flat.
If you sell another flat too, then you can buy a flat for value (value of your share in flat) more than capital gains from flat + sale proceeds of plot to save income tax. Possession of new flat must be done before completion of two years from both plot and flat.
Dear Pankaj ji
I had sold an ancestoral property this year for 1.1 crore. I n order to save capital gain, I have invested this money in new properties. But I am left with 20 lacs. If I give this money to my sister as gift, can i safe capital gain tax?
@Surinder
Income tax cannot be avoided by gifting money to somebody else.
I have purchased plot Rs.90,000/- in 1998. In 2005 we have build home at the construction cost of Rs.6,00,000/- on that plot. Now this year 2011 we sold it Rs.25,00,000/-. so my question is what is the capital gain tax i have to be pay. How can i save that. Can I purchase agriculture land from that gain. Thanks
@Sandeep
Below is an indicative computation of capital gains (please note that CII for 2011-12 has been assumed as 800, as it has not been declared yet)
Purchase Year = 1998-99, Purchase Cost = 90000, Cost Inflation Index (CII) for purchase year = 351
Construction Year = 2005-06, Construction Cost = 600000, Cost Inflation Index (CII) for Construction year = 497
Indexed Purchase/Construction Cost = 90000 x (800/351) + 600000 x (800/497) = 1170923
Long term capital gain = 2500000 – 1170923 = 1329077
Income tax on capital gain = 1329077 x 20% = 265815.4
To save this income tax under section 54, you can buy another residential property for purchase amount more than 13.2 lacs within next two years. Agricultural land purchase won’t be allowed for exemption in your case.
You can also save tax by investing capital gain bonds, under section 54EC.
Hi Pankaj ji,
I have sold my residential land in Nov 2010 for 9.6 lakhs ( Purchase price was 43000 in 1992).I have booked a flat which costs close to 59 laks and paid 2 installments worth 11 lakhs.I dont have any other property in my name.The Flat will be completed in June 2013 do i qualify for Capital gains exemption.
Also do i need to indicate this transaction in my income tax filing for 2011.
Rgds
@Gopal
As you will get possession of new flat in June 2013, which is after two years of sale of land, you won’t be eligible for tax exemption.
You will have to pay income tax on this gain and show in income tax return.
In case of purchase of new property, it has to be only your name right? Does the possession come into picture or is it the sale agreement date after which the flat is under your name?
@Ghanshyam
New property has to be in your name (jointly or single owned). You must get possession of new residential property and registration in your name before end of two years from sale of old one.
Hmm…What if the possession date is pushed forward or delayed by the builder so it goes beyond the 2 years limit, but you have already completed the registration process?
@Ghanshyam
If possession is not delivered but registration has been done, it can be considered for tax benefits.
Thanks Pankaj! That is what I wanted to confirm.
before end of two years from sale of old one… two years means Two Financial Years to be considered or 24 months from Sale Date to be conisdered ??? For e.g. if old house is sold on 02nd May 2011, then new house to bought/regd/possession should be taken before 02nd May 2013 or cut-off date is end of FY 2013-2014 i.e. 31st March 2014 ???
@Vikas
Two years is from date of sale of old property.
if old one is sold on 2nd May, 2011, new property must be bought by 2nd May 2013.
thx a lots… achaa and lets say Old House is sold for 35L and new house’s (which is currently under construction, possession in 18 months) Regn Agreement amount is of 25L and 2.50L are towards Elect Board+Society Main Fund+Regn/Documentation Chgs+Service Tax Charges which are to be paid at the time of Possession and expenses amtg to 2L will be incurred by us for interiors+modification+p.o.p+paint shade as per our choice selection, this amt also to be paid to the interior decorator at time of possession only. So, what will be my LTCG ? 35L-25L-2.50L-2L = 5.50L ? (Indexation is ignored for convience to calc.)
@Vikas
You will have to compute long term gains on old house which is being sold.
If old house is being sold after keeping for atleast three years, then long term capital gains (LTCG) will be = Selling price – Indexed cost of house. (say 35L – 10L)
To save income tax on this capital gains, a new house should be bought with this gain amount.
You can include registration, documentation charges in the purchase cost but not the other costs mentioned.
New house cost has no significance in computing long term capital gain of old house.
oops i mis stated my query…i meant to ask tht LTCG is 35L on sale of old house. I have booked a new flat in new society which is currently under construction, for 25L and 2.5L is to be paid for Elect Board+Society Maintenance Fund+Regn/Documen Chrgs+Service Tax, 2L for alterations/modifications to the new house structure. This amt of 2L wudnt be shown in the Regn Agreement coz these things Developer said he wudnt do but we have to do on our own when possession is in its final stages.
The Old House is sold on 02.05.2011 and 25L for new flat is paid to the Developer in June’11. Balance 2.5L & 2L to be paid at the time of possession.
Now can i say that cost of New House is 25+2.5+2 = 29.5L, which can be claimed for exemption of LTCG on Old House ? i.e. LTCG on Old House = 35L Less Amt invested in new house 29.5L i.e. 5.5L ?
In my case, what will be the cut-off date to buy NHAI/REC Bonds to claim exemption.
@Vikas
In the cost of new house, registration cost and modification cost for structure changes can be added, but not the society maintenance and electricity board payment.
You will have to pay tax @ 20% on remaining amount (35-25-2-registration cost).
The cut-off date to buy capital gain bonds is six months from sale of asset.
thx a lots for ur replies and helping me solve my queries. 🙂
I have residential house purchased in 2005 for 16.5L. According to circle rates presently the value is 48L. I am getting 26 L offer for the same. I will buy new flat of which posession is due in Aug 2011 and cost is 40 L. What happens if first property is sold below circle rates. Does it have any implications on the seller? Will i pay LTCG?
Please let me know in case of Group Housing Societies whether the CII applies from the date of allotment by the Development Authority/obtention of No Due Certificate from Society/possession? What is the implication If the lease hold is not carried out and remains under the orginal membership certificate by way of Share Certificate. Does this have any implication of CII if the registration is done much much later/or not done at all
Regds, Diwakar
@Diwakar
In case registration is not done for some unavoidable reasons, then possession date can be used for CII.
However there are cases where allotment has been considered for same after assessee filed a court case.
@Himendra
Capital gains will be computed as per circle rates.
Below is an indicative capital gain computation (CII for 2011-12 has not been declared yet and assumed as 800):
Purchase Year = 2005-06, Purchase Cost = 1650000, Cost Inflation Index (CII) for purchase year = 497
Sale Year = 2011-12, Selling price = 4800000, CII for sale year = 800
Indexed Purchase price = 1650000 x (800/497) = 2655936
Long term capital gain = 4800000 – 2655936 = 2144064
Income tax on capital gain = 2144064 x 20% = 428812.8
As you are buying a new flat with price more than 21.44 lacs, there won’t be any income tax on capital gains.
Hi Pankaj,
I am planning to book a flat in an under construction building. Does the purchase date start from time of registration or when I actually get possession?
For eg. I pay the booking amount and the 10% of the flat cost to the builder this month and then register it by August 2011. The possession is in Dec 2013.
Which one is counted the purchase date?
@Raj Singh
You can treat date of registration as purchase date, when property is actually transferred in your name.
what if the assessse is selling 1/4th of the long term capital asset , i.e one floor only( being a residential house) and 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) …?
@Kanika
If only a part of long term asset is sold, then capital gain computation will be done only for that part.
Same rules as per section 54 applies here as well. If you buy another residential property within next two year or within one year before, income tax exemption will be applicable.
i purchase in 2002 one plot 70000rs i sold 6lakh in 2010
1 what is the time limit of reinvestment in new plot
2 what is the time limit of investment bond
3 how many amount of tax
@Basant
Below is tax computation:
Purchase Year = 2002-03, Purchase Cost = 70000, Cost Inflation Index (CII) for purchase year = 447
Sale Year = 2010-11, Selling price = 600000, CII for sale year = 711
Indexed Purchase price = 70000 x (711/447) = 111342
Long term capital gain = 600000 – 111342 = 488658
Income tax on capital gain = 488658 x 20% = 97731.6
In order to save this income tax, under section 54F, the whole selling price has to be invested again into a residential property (Not a plot) within two years of sale or it can be within one year before sale. Also a new house can also be constructed within three years of sale. But there is a condition for tax exemption, one should not own more than one residential property at the time of buying new one.
Tax can also be saved, under section 54EC by investing whole sale consideration amount into capital gain bonds within six months of sale.
My father constructed a house in 1987 for 5.5 Lac (including land price). He is now planning to sell it and buy two apartments in the same complex for around 1.5c. The amount which he would be getting by selling the property is the same 1.5c. My question is, will there be in capital gain tax? Can he buy one property on my name and the second one on his name? Can he purchase the apartments in the same complex?
@Akash
Below is an indicative computation of income tax.
Purchase Year = 1987-88, Purchase Cost = 550000, Cost Inflation Index (CII) for purchase year = 150
Sale Year = 2011-12, Selling price = 15000000, CII for sale year = 800 (has not bee declared yet, assumed as 800 based on historical records)
Indexed Purchase price = 550000 x (800/150) = 2933333
Long term capital gain = 15000000 – 2933333 = 12066667
Income tax on capital gain = 12066667 x 20% = 2413333.4
There is a capital gain of around 1.20 CR. In order to save income tax completely on this, under section 54, you can buy another residential property with purchase price equal or more than capital gain (~1.20 in this case).
Please note that exemption is only available against a single property. If your father buy a single apartment for more than 1.20 crores, income tax will be saved.
In case he buys two apartments, you may only consider the one with higher price, say 90 lakh. In that case income tax will have to be paid on remaining gain amount (say 1.20-.90 = 30 lakh) @ 20%.
Property against which you will be taking exemption, has to be bought in the name of same person.
New residential property can be purchased anywhere in India.
Hi,
My father bought a house in 1979 at the price of around 78K. Now after that we did lots of reconstruction of the home and i am planning to sell that house at around 70-75lac Rs. So in that respect i want to know the following:
1) What is the tax that i need to pay for this?
2)I have bought another flat for which i am paying home loan. If i repay that home loan from the money i will get by selling this house, shall i get any tax exemption?
Regards
SR
@SR
In order to computer long term capital gains and income tax on that, we need following more information:
1. Fair market value of house in financial year 1981-82. As CII (Cost inflation index) was started in 1981, this approx figure in needed.
2. Amount spent and years in which reconstructions were done.
With some rough estimate, if you sell it now at 70 lakh (without considering reconstruction cost and fair value in 81-82 as 1 lakh) then long term capital gain will be around 62 lakh and there will be 20% income tax payable on that.
There is no income tax benefit of repaying home loan with long term capital gain amount.
If this new flat has been bought within one year before selling old house, then income tax benefit can be taken under section 54. But That too will be applicable if both the properties are in name of the same person.
My father bought a property in 1970 at the cost of Rs 2000 for 27 bigha.Now he wants to sell this property (2011). the circle rate of land is Rs 10 lakh per bigha but the market price is far less (3 lakh).
what should i do to save tax n pay tax on actual transaction cost. some persons say that tax has to be paid as per circle rate. please gve me advice whether it is correct or not? what is the provision of “Distress Selling”?
@Rajeev Anand
Capital gain will be to computed as per ongoing circle rates or the selling price, whichever is higher.
We don’t have any idea about distress selling in income tax terms.
I have Puchased a 1 BHK flat in Mumbai on 30th June 2003 in Rs. 13,16,550 and sold it on 29th March 2011 in 40,00,000. Please advice.
a) What is the Capital Gain Tax liable to me?
b) Can I purchase one or more residential plot?
c) What if I purchase a residential plot in other city and do minimal construction to overcome the liable tax amount?
@Vikas
1. Below is computation for long term capital gains and income tax:
Purchase Year = 2003-04, Purchase Cost = 1316550, Cost Inflation Index (CII) for purchase year = 463
Sale Year = 2010-11, Selling price = 4000000, CII for sale year = 711
Indexed Purchase price = 1316550 x (711/463) = 2021743
Long term capital gain = 4000000 – 2021743 = 1978257
Income tax on capital gain = 1978257 x 20% = 395651.4
2. In order to save tax, LTCG has to be invested into a residential property (house/flat) or a new house must be constructed. So exemption will be available on buying a residential plot alone.
3. If you purchase a plot and construct a house on that, income tax benefit will be available. In order to make tax zero, you will need to shell out atleast 19.8 lakh for new house.
I was working in Singapore and due to recent job retrenchment left Singapore and came to Haridwar. Since my wife had an Savings account in Haridwar hence I transferred all my Singapore earnings to my wife SB account in Haridwar so that I can start some biz soon and buy a house to live. Here important is my all earnings in Singapore has Income Tax clearance. My bank advised to take Fixed deposit for the amount
Please advice will the received amount be considered as Income for my wife?
What can I do to save any tax from this accounting issue ?( if any) may be i can add my name as joint account holder?
Please advice
@Vikas
You can transfer amount from Singapore bank to your wife’s account as gift.
There is no income tax for gift to wife.
Hi,
My brother and I jointly owned a flat which had cost us Rs. 300000, bought in some in 2001. This year January end, we sold it for Rs. 1000000. My calculations for logn term capital gain tax are below:
Purchase Year (probably after April 01) = 2001-02, Purchase Cost = 300000, Cost Inflation Index (CII) for purchase year = 426
Sale Year = 2010-11, Selling price = 1000000, CII for sale year = 711
Indexed Purchase price = 300000 x (711/426) = 500704
Long term capital gain = 1000000 – 500704 = 499296
Income tax on capital gain = 499296 x 20% = 99859.2
Now questions:
1. My individual Capital Gain would be 499296/2 = 249648. Are my calculations correct?
2. Somewhere above you mention that to save this tax, if reinvesting, then it should happen in same name. In my case, if I now reinvest independently, can’t I save tax since this property would be only in my name (or in jointly with my wife) and not jointly with my brother?
3. I will need to invest Rs 249368 before July end (6 months from January end) assuming I do not want to keep the tax amount in Capital Gain Account Scheme and withdraw later for investing), right?
4. For filing returns, what all documents are needed for attaching. One CA I enquired is asking for Index2 copy when we bought it and Index2 copy of new property that I might buy.
5. Are the bank statements (for dates) needed to be attached to prove that you are investing from your own pocket as opposed to what you got after selling?
Please let me know since this is urgent and I need to make a decision in a week or two.
Thanks!
Ghanshyam
@Ghanshyam
1. Your individual capital gain will be in same portion as the joint property is. If its equal holding of 50-50%, then your gain will be 249648 as you computed.
2. You can invest independently now. New property can be on your single name or joint with anybody (wife/brother/son etc). But your share should be more than your capital gain share to make income tax zero.
3. Six month time period is for capital gain bonds. For Capital gain account scheme, investment has to be done before tax filing (July end). So you may buy a new property before tax filing and show exemption for same in income tax return.
4. No document need to be attached with income tax return. IT department won’t accept any attachment.
5. Declaration of exemption is fine, no proofs need to be attached. In case IT department has any doubt they can raise a query.
Hi Pankaj, thanks for your answers! I was reading your answer to @Gopal about possession of new property while evaluating eligibility for exemption of Capital Gain tax. You have mentioned that since his possession is somewhere in 2013, he would not be eligible even if he has paid 11 lakhs already. I would think that as per tax rules, it would be the “transfer” date that matters to say that you have purchased the property and not the possession date. Am I right?? So as per my thoughts, @Gopal should be eligible if he has already done the Sale Agreement, right?
@Ghanshyam
Sale agreement is not considered for income tax purposes. You should have possession or registration of property in order to claim exemption.
Transfer date is generally registration date, but in some cases court has ruled in favor of possession (handover of property).
While sale agreement is done, you are not a legal owner of property.
Dear Mr.Pankaj,
Please refer to my earlier question
I have sold my Land in Nov 2010 for about 10 lakhs ( purchase price in 1992 was 43000). I have booked my Flat in may and paid 20% of flat value which comes to aroud 11 lakhs.We will be registering the UDS of the Flat to my name by Jan 2011 so will it be considered as a Transfer date and i can save on Capital gain Tax.
My actual pocession date of occupying the flat is June 2013.
I saw your answer to Ghanshyam, I hope you can clarify further so it is clear to everyone.
Rgds
Gopal
@Gopal
If registration of the new property has been done in your name, then you can avail capital gain exemption under section 54F.
However there have been n number of different cases in court in which allotment, possession and registration dates have been considered on case to case basis.
If you think you have paid substantial amount (or whole) of gains in acquiring new property, but did not get registration or possession due to unavoidable circumstances, you may also fight with income tax department in court for exemption.
Hi Pankaj,
I bought the property in 1994 at Rs. 2.5 lacs (CII= 244) and am about to sell the same this year at 12.75 lacs (CII=785). According to your calculations, I need to pay Rs. 95000 as income tax, right?
@MJ
Yes, below is calculations:
Purchase Year = 1993-94 , Purchase Cost = 250000 , Cost Inflation Index (CII) for purchase year = 244
Sale Year = 2011-12 , Selling price = 1275000 , CII for sale year = 785
Indexed Purchase price = 250000 x (785/244) = 804303
Long term capital gain = 1275000 – 804303 = 470697
Income tax on capital gain = 470697 x 20% = 94139.4
Hi Pankaj,
Glad to see a expert advice and in detailed too.
We have sold a land in Feb2011 for Rs 23lks which was purchased in 1986 for Rs 30000. That was owned by my parents equally( 2 acres, one each). Now we are planning to build a house in land which was inherited by my dad. Does it attract capital gains tax? Have followed the complete thread and got an idea that it wouldn’t.
But my dad already owns the house we stay. I can have the new house be built on my mom’s name or jointly. In that case does the half amount of 23lks attract LTCG?
If it does, Please suggest any better option if any!
@Phani
Under section 54F, to save income tax on capital gain from sale of land, consideration amount can be invested back into a residential property or construction of a new house.
Capital gain has been earned by your mom and dad. So if they construct a new house (independently or jointly) on land they owned, income tax can be saved.
Only condition this rule has is, one cannot own more than one residential property in his name at the time of buying/constructing new house.
If your father already own a single house, that should not be an issue, but if owns more than one then income tax benefit won’t be available.
Yeah, my mistake. I wanted to say Registration but said Sale Agreement. Thanks!
I took home loan for purchase of home which was in my father’s name in 2004-5. The same was transferred to my father through settlement deed in 2007.
I purchased a new home in 2008. Am I to pay any tax for the same?.
@Geetha
As you did not sold property, there won’t be any capital gains and hence no income tax is payable.
Hi Pankaj – Thank You for your knowledge sharing and expert advice. I have a question –
I plan to sell my current house (bought in 2003) and buy a new one. Selling my current house will involve me a LTCG of around 50 lacs. The new property I am planning to buy is roughly 1 crore. If I buy the new property in advance using a mix of my own funds (plus some bank loan – say 50 lacs of my fund and 50 lacs of bank loan) and sell the old house within 6 months of buying new one then can I adjust the LTCG of the old house against the new house which I bought in advance.
Regards
@Sushill
Under section 54, If you buy another residential house with amount equal or more than long term gain amount (50 lacs in your case) within one year before sale of old property or within two years after sale, there won’t be any income tax payable.
As you are buying new flat 6 months before selling old flat with an amount more than capital gains, you need not be pay any income tax.
Hi,
I bought a land (plot) in March 2007 for Rs4,50,000. The buyer insisted on cash payment and the registration was also done as per circle rates (Rs40,000) which was very less. I paid by white money (withdrawn from bank) to him all the Rs4,50,000. Now, I have sold this for Rs8,80,000, and the registration is also done as per current circle rate of Rs54,000/.
Now, I have few questions.
1) My actual net income is 8,80,000 – 4,50,000, which is Rs4,30,000/- I am ready to pay 20% tax for this income. Now, how do I prove that my purchase cost was Rs4,50,000? Since the registration papers are not showing the actual money that I spent, what is the alternate option to show to income tax department about the actual?
2) I have deposited my current income of Rs8,80,000/- into three banks. I want to buy another plot in a different place. The other plot owner is also insisting on paying everything by cash. Again, the registration is also based on circle rates which is very low. Is there a way to make it legal with everything as white?
Regards,
Sriram.
@Sriram
Your query has been already answered on http://www.socialfinance.in/questions/844/buying-and-selling-land-using-cash