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 sir, If I receive as settlement of property (20 yrs old) sold by my mother as a gift and the proceeds is directly paid to builder for purchase a flat for myself which is only a part payment of the flat balance i will go for home loan am i liable to pay LTCG on proceeds.
PL ADVISE
@Peter
If property is now in your name, you sold it and bought a new flat with consideration amount, then there won’t be any income tax payable to you.
But if your mother sold the property, capital gains will be hers and she is liable to pay income tax on that amount before gifting it to you. If she wants to save tax on that, new flat has to be on her name.
Sir, She is Senior Citizen (76 yrs) is she lable for tax and as no occupation. any other provision for her to be exempted.
rgds
peter
@Peter
She can invest into capital gains bonds (u/s 54EC) to save income tax on capital gains.
Hi Mr. Batra,
Greetings! I visited your site a few months ago and had rasied a query on how to save the capital gain tax on a recent property dealing. I have a new query now and hope you give me your inputs.
Background: A land bought by my father in the year 2002 for an amount of 65,000 was sold in the year Jan 2011 for 7,08,000. In your last advice, you had asked me to either pay a Capital Gain Tax of Rs 1,20,000 or Invest the entire amount in the Capital Bond scheme.
Scenario 1: My father now paid a tax of Rs 1,20,000 as he did not find a suitable property to buy. Now that he has found a property of his choice, can we go ahead with the purchase and claim for a refund of the already paid income tax?
Scenario 2: Let’s assume that he had invested the entire amount in the capital bond that you spoke about, which has a lock in period of 3 years (i guess) within the first 6 months of the sale, then can he withdraw the same amount if he plans to buy/invest the same and more amount in another property in the next year or so. In other words, is there a provision for withdrawal of the amount should we find a suitable property post 6 months of the investment of the amount in capital bonds. Also, are there any charges levied against the withdrawal if we plan to withdraw the amount?
@Rohan
Case 1: In case income tax return has not been filed yet, you can do it. But if you are not able to buy property before 31st July, please deposit sale consideration amount in Capital gain account scheme and then later pay the seller from this account. In case neither property has been bought nor amount has been invested in such account, income tax is payable.
Case 2: I believe premature withdrawal is not possible on capital gain bonds. If in any case they are withdrawn, capital gain will have to be paid.
My relative is a 75 years old widowed woman. She has 3 sons and 3 daughters. she has a property in chennai. The land was bought in the year 1971 by her husband and a building was constructed which got transferred on her name after the demise of her husband about 15 years back.
Now she wants to sell the property and divide the share in to 7 parts and keep one share to her and give away the balance 6 shares to each of her children equally.
Is it beneficial to do a settlement of the property on all the children name before the sale property or after the sale of the property to minimise the capital gains tax
@Jaya
If property is sold, income tax will be payable on long term gain arising from it (20% with indexation benefit).
If she transfer property to her children name before sale first and then children sell it, then gains will be divided among children and they will have to pay income tax on their share of gains. Each individual will be taxed individually and can claim income tax benefit under section 54 (buying another residential property) or 54EC (investing into capital gains bonds).
In case she decide to sell it first, she may divide the sale consideration amount to her children after paying income tax on gains. Or she can just invest gains part of selling price into a property or capital gains bonds and divide rest money among children.
Hi Pankaj — It’s nice that you are sharing knowledge with us…
My mom has a piece of land that was n for development. As per the agreement my mom would be getting 5 flats.
Could you please help me on how to save capital gains while selling these flats
Note: My mom does not possess any other capital asset or residential property other than the 5 flats that are under development
@Harsh
In order to save income tax, the gain arising from selling these flats can be invested into residential properties under section 54.
Even five new properties can be purchased (each costing more than gain of each sold flat) or whole total gains can be invested into a single new property also.
Under section 54EC, Tax can also be saved by investing gains into capital gain bonds.
Thanx Pankaj…
One more clarification –
Scenario: When my mom sells one flat out of 5 (keeps the remaining) and buy ‘s another flat elsewhere with amount > ( capital gains out of the sold flat ). Will there be tax levied in this case, considering the fact the there are still 4 more flats still under her name.
Is she still eligible for exemption? – I am having this doubt because there are 4 more flats under her name and this should be violating. Please correct me if I am wrong.
Thank You
@Harsh
In case of section 54, there is no such condition that person cannot own more than one property.
This condition is there in section 54F, which applies when you sell a capital asset other than a residential property (like gold, land, commercial property etc)
She can still sell one flat and buy another one to save income tax.
Hi Pankaj,
Thanks for your the reply…..
Could you please guide on how to compute the capital gains in this regard
The land was bought in 1983 for Rs.X
Development on this land was agreed on 2009
Now I am planning to sell 1 out 5 flats for Rs.Y amt.
Also on reading section 54, I came to know that the residential property should be held for atleast 3 yrs before sale. Would this be violation? Because the flat is newly constructed.
Thank You
@Harsh
As you already purchased land in 1983 and constructed house on this now,. Three years period should be considered over and it should be counted as long term gains.
HI, MR.BATRA
NICE TO HEAR THOSE QUERIES BEING REPLIED,
I HAVE ONE QUERY TOO, WE HAVE A COMMERCIAL BUILDING AND A RESIDENTIAL OLD BUILDING (PART RESIDENTIAL AND PART BUILDING) NOW WE ARE PLANNING TO SELL IT OFF NOW HOW THE CG TAX BE APPLIED , AND HOW CAN I SAVE SOME .
NOTE THAT THE PROPERTY IS PRETTY OLD MAYBE 70 YEARS. THERE ARE 6 LEGAL HEIRS TO THIS PROPERTY , PLEAE LET ME KNOW HOW THE CG TAX BE APPLIED ON COMMERICAL BUILDING AND THE RESIDENTIAL BUILDING AND HOW CAN WE AVOID IT.
REGARDS
RAJENDRA
@Rajendra
If you sell commercial building, section 54F or 54EC can be applied to save income tax.
In case of residential property, section 54 or 54EC can be used.
Under section 54, if you buy a new residential property for value more than capital gains, within one year before sale or two years after sale, income tax is not payable. In case a new house constructed, it can be done within three years of sale.
Under section 54F, Same as 54 with some changes. Whole amount of sale consideration has to be invested in new property. One cannot own more than one residential property at the time of buying new one. Also cannot sell this residential property for next three years and cannot buy another residential property for next three years.
Under section 54EC, you can invest capital gains (whole amount of consideration in case its not a residential property) into capital gain bonds within six months of sale.
thanx for the reply,
Have one more query , can we keep this whole sale proceeds into a Fixed deposit in a nationalised bank andenjoy the tax excemption ? i don;t mind paying tax on the interest earned on this FD but however is there any way other than investing in bonds. to avail the excemption. If the sale proceed value is say 50 lakhs what will be the LTCG calculated on , the property was purchased by my Great Grand father say around 80 years back , how will the ltcg be calculated. and percentage of tax applied.
Reards
Rajendra
@Rajendra
Sale consideration amount cannot be kept in fixed deposit to save tax.
Other way to save tax than to investing in capital gain bonds is to buy a residential property.
Capital gains and income tax has to be computed like calculations below:
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 CII was started from 1981-82 with value 100, A should be taken as 1981-82 and Purchase cost P should be assumed as fair market value of property as on 1st April, 1981.
Hi Mr Batra,
My Father has bought a joint property in 2003 at CP 14 lacs . After my father got expired in 2005 the property is being transferred on my mother, 2 sisters & My name. We want to sell the property now can you please let me know how LTCG is treated in our case if we sell the property in 23 Lacs the Profit would be 9.00 lacs over a period on 8 years. In this my mother will get all the money so what she has to give us a gift & then we have to pay LTCG indivisually or single person can pay the tax. secondly we have bought one property in Gurgaon which is on my mother’s name can we pay the same pricipal + profit i.e. 23 lacs in tht property to save LTCG ? if we have to pay tax then please also let me know how LTCG is calculated.
rgds// Tejvinder Batra
@Tejvinder
As per figures provided by you, there is no long term capital gains. In fact its a loss.
Purchase Year = 2003-04, Purchase Cost = 1400000, Cost Inflation Index (CII) for purchase year = 463
Sale Year = 2011-12, Selling price = 2300000, CII for sale year = 785
Indexed Purchase price = 1400000 x (785/463) = 2373650
Long term capital gain = 2300000 – 2373650 = -73650
My friend got a indexed capital gain of Rs. 1.20Cr. Can he invest Rs. 50 Lac in bonds and balance Rs. 70 Lac in residential property/land ?
@Prashant
Income tax acts are not very clear whether both exemptions can be taken simultaneously.
I would advise you to consult from any experienced property consultant or tax professional.
Hi Pankaj
Let me thank you for answering so many queries.
Here is a query from my side.
I bought a flat in year 2004 at a price of 17 lacs.
I bought a new flat in the year Jan 2011 for 75 lacs for which I took a loan of 30 lacs from HDFC.
I sold my old flat in July 2011 for 47.25 lacs.
My query is Am I liable to pay tax as I have bought a new flat. It is just that I bought the flat before I sold my old flat.
@Ramesh
As you already bought a new house with value more than capital gain arising from sale of old house, under section 54, there won’t be any income tax payable on this transaction.
Under this rule, a new house must be bought within time period of one year before sale and two years after sale.
Also please make sure possession and registration of house is done within two years from sale of old flat.
Hi Pankaj,
Nice to see your replies for many. Hope to see answer for my schenario…
Indian – bought plot Year 2001 (Citibank loan) – Migrated to Singapore 2001 – Paid all loan using FCY through father’s domestic account – became citizen of singapore 2011 – also got OCI (overseas citizen of India, equivalent to PIO) – want to sell the plot now.
Tax applicable? If yes, how to avoid?
Thanks in advance.
@Prabhakar
Income tax on long term capital gains will be applicable on selling your plot in India.
Under section 54F, you can avoid income tax by buying another residential property for amount for sale consideration received from selling plot. This new property has to be bought within two years of plot sale. If a new house is constructed, it must be done by three years. But at the time of buying new property, you should not be holding more than one residential property.
New property cannot be sold in three years from purchase and no other new residential property can be purchased in these three years.
If new property is not purchased before income tax return filing for plot sale year, whole sale amount must be deposited into capital gain account scheme and payment for new property has to be paid from this account only. If this money is not used within three years, capital gain will be applicable on withdrawal.
You can also save income tax under section 54EC, by investing whole sale consideration amount into capital gains bonds (issued by NHAI and REC). Maximum limit of investment is 50 lacs per year. Investment has to be done within six months of sale of plot (If these six months falls in two different financial years, you can invest one crore by investing 50 lacs each in two different years)
Thank you ver much. Appreciate it.
Dear Pankaj,
You clarified my last querry but I have one more. We are having a 20 years old flat on my fathers name which was purchased for 3 lacs in 1991. We are selling the propety for 20 lacs and want to invest 17 lacs immediately in the new propety which is on me and my fathers name. My father wants 3 lacs for his own expenses. Is it possible? I mean will there be a capital gain on remaining 3 lacs? Please guide
@Santosh
Below is the computation for long term gains:
Purchase Year = 1991-92, Purchase Cost = 300000, Cost Inflation Index (CII) for purchase year = 199
Sale Year = 2011-12, Selling price = 2000000, CII for sale year = 785
Indexed Purchase price = 300000 x (785/199) = 1183417
Long term capital gain = 2000000 – 1183417 = 816583
As capital gains is only around 8.2 lacs, if your father invests this amount into buying another residential property, There won’t be any income tax.
In case, in the new property your father share is around 50% (value of share becomes 8.5 lacs), there won’t be any income tax payable on long term gains.
Dear Pankaj,
How will be the calculations if the same property is to be sold @ 14 lacs. Please guide.
Thanks.
@Santosh
Below will be computation for 14 lacs sale:
Purchase Year = 1991-92, Purchase Cost = 300000, Cost Inflation Index (CII) for purchase year = 199
Sale Year = 2011-12, Selling price = 1400000, CII for sale year = 785
Indexed Purchase price = 300000 x (785/199) = 1183417
Long term capital gain = 1400000 – 1183417 = 216583
Income tax on capital gain = 216583 x 20% = 43316.6
Thanks a lot for answerign the query Pankaj
Thanks once again
Ramesh
hello sir,
I have 1 q.
My mom has sold 2 commercial shops recently in which long term capital gain has occured.
How can we save it and she already own 1 residential house.how it would affect.
@Bhawana
In order to save income tax on long term gains (from selling commercial property), she can invest sale proceeds in a residential property (u/s 54F) or invest sale proceeds in capital gain bonds (u/s 54EC).
She meets the eligibility criteria if she does not own more than one residential property at the time of buying a new property.
Hey,
I have a question also, but my question for CGT relates to shares and mutual funds. I am a beginner Investor int he stock market & wanted a brief know how on basic methodolgy of calculation and filing of CGT if I trade shares on the BSE-30.
@Mohammed
If STT (Securities transaction tax) is paid on transactions, then short term gains (holding period less than a year) will attract 15% tax rate. Long term gains from stocks (holding more than a year) will be tax free.
Hi,
I have recently purchased a second house. Now if I sell my first house within the same financial year can the capital gains tax be avoided?
Best regards,
Pravin
@Pravin
If house is sold before three years, short term gains will be applicable. Whole gain will be added to your taxable income and taxed at as per your slab rates.
Thanks Pankaj for your reply,
I had one more question, what would be the proper procedure forfiling CGT ?
would I be filing it quarterly or annually? also would I file it with my Income tax return online or I would need to file it seperately ?
@Mohammed
You will have to pay income tax before 31st March of financial year in which gain is incurred. After this date, there will be interest payable under section 234B
It has to be declared in the income tax return to be filed by 31st July.
What are the provisions regarding capital gains arising out of sale of Industrial NA land situated 10 Kms beyond city corporation limit in a Grampanchayat area?
Is it true that if capital gains tax is Rs. 10 Lacs and we invest 10 lacs in Capital Gains bond, we will save on entire capital gains tax?
Is there any other option to save capital gains tax?
@Umed
Sale of industrial land will be considered long term gains if holding period is more than three years. Income tax is payable on this gain @ 20% with indexation computation.
In case of such long term gains, income tax arising on that, can be saved under section 54F or 54EC.
Under both these section, you will have to invest whole sale consideration amount (selling price) into a residential property or capital gain bonds.
Dear
Sir,
Purchased a land & constructed a house about ten years
back ( in two names with first name of mine). Sold some other land
about three years back, this was in wife’s name and purchased a flat(I
also invested money), registry in the month of Oct,2010(it was also
purchased in two names with first name of wife ). Recently I Sold a plot
which was in my name. Please let me know how can I save long term
capital gain.
@Subhash
If a piece of land is hold for more than three years and its sold afterwords, long term capital gains arises.
Income tax is payable on long term capital gains @ 20% after indexation benefits. Such tax can be saved under section 54F and 54EC.
Under these sections, you will have to invest whole sale consideration amount (selling price) into a residential property or capital gain bonds.
congratulation, and keep up your good work.
i have a house which is bought in 1973, i am getting old , hence i sold it in 2010. a part of the proceeds i had to pay of as by debts, and the remaining i bought a small flat to live and also bought another additional property to have a regular rental income. all this happened within one year. now let me know 1. if at all i am eligible for capital gains,2. can the registration cost for buying the new property be taken into account.
@Sudhakar
As you sold your house, income tax liability will arise on capital gain incurred.
This income tax can be saved as per section 54, in case you buy a new residential property within two years of old house sale. In case new flat cost is more than capital gain earned (with indexation calculations) then there is no income tax payable.
Registration cost for new property can be added to new house cost.
Hi Pankaj,
My wife owns a piece of property along with her brother and cousins. The property was gifted to the grandchildren by their grandmother. All of them are now looking to sell the property. What are the tax implications for my wife in this scenario (she is currently a salaried employee, working with a software firm)? Please advice on options to avoid the long term capital gains tax. Thanks.
@Phani
There will be income tax payable on arising capital gains from sale in her share in property.
Under section 54, To save this tax, she can buy a new residential property in her name within two years of property sale. New property cost should be more than her capital gains to save tax fully.
She can also invest in capital gain bonds (u/s 54EC) to save income tax.
Dear Pankaj,
many thanks for your valuable suggestions and replies to my queries raised earlier regarding capital gains from sale of house hold property and purchase of new property in lieu. However I have one more query to ask you. Under which section of income tax the cost of purchase of new property is to be deducted from capital gains. Also please intimate which is the best book available in the market showing various types of computations of income tax and various types of return forms applicable. Please intimate.
@Devnendra
Section 54 and 54F is applicable for income tax benefit on capital gains.
You can buy income tax books from TaxMann.