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Any profit from a capital asset is classified as Capital Gains for income tax and will be subject to capital gains tax. Land is treated as a Capital Asset, and as its value appreciates, the owner will realise significant capital gains upon its sale. Nonetheless, it is worth noting that the agricultural land in rural areas of India falls beyond the purview of Capital Asset. As a result, no capital gains tax is applicable upon its sale. In this blog, we will understand how profits from the sale of land are taxed and explore tax-saving methods.
The gains you make by selling a capital asset are known as capital gain. Capital Gain can be classified into Long-Term Capital Gain and Short-Term Capital Gains. The classification depends upon the duration of the asset remaining in your ownership.
The tax charged on capital gain is known as capital gains tax. It is charged under the head of capital gains for sales made in the previous year. You become liable to pay capital gain tax when:-
The tax implications vary depending upon whether the gains are categorised as short-term or long-term. Capital gain from land will be treated as short-term if the land is owned for up to 24 months (or 2 years) before selling. However, holding for more than 24 months will be considered long-term capital gain.
The process to arrive at Short Term Capital Gains (STCG):-
For Long Term Capital Assets, the only extra thing you can deduct is the Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation means adjusting the purchase price for the impact of inflation by applying the Cost Inflation Index (CII)1. This type of adjustment increases the cost base and lowers your profits.
Section 54F (applicable on long-term capital assets)
Capital gains exemption can be claimed if you satisfy the following conditions:-
If you satisfy these conditions and invest the entire sale proceeds in the new house, you will not be liable to pay any taxes on your gains. But, if you partially invest the sale proceeds, the exemption will be in proportion to the invested amount, i.e., cost of a new house * capital gain / net considerations.
Finding a suitable seller, arranging the requisite funds and getting the paperwork for a new property can be time-consuming and tedious. Luckily, the Income Tax Department understands these limitations. Suppose you’re unable to invest your capital gains till the date of filing your income tax return, i.e., usually 31st July). In that case, you will be permitted to deposit your gains in the Capital Gains Account Scheme (CGAS). You can claim exemption from capital gains, so you don’t have to pay tax on it.
If you do not wish to purchase another property, investing the amount in a Capital Gains Account Scheme is of no use. In this case, you can still save tax on your capital gain by investing them in certain bonds:-
These are redeemable after five years, but they cannot be sold prior to the lapse of 3 years from the date of sale of the house property. A period of 6 months is allowed to invest in these bonds, but to claim this exemption; you will have to invest prior to the return filing date. The Budget for 2014 has prescribed that you are allowed to invest a maximum of INR 50 lakhs in these bonds in a financial year.
In summation, any profit from a capital asset is classified as Capital Gains for income tax purposes and will be subject to capital gain tax. Land is treated as a Capital Asset, and as its value appreciates, the owner will realise significant capital gains upon its sale.
When you sell any land, you have to pay capital gains tax on the same.
You can avoid capital gains on land sales by purchasing a house within one year before the date of the land sale or within two years after the sale.
One way to avoid long-term capital gains on the sale of land is to invest the sale proceeds from the sale of a property in another property within 2 years before or after the sale to claim exemption under section 54 of the Income Tax Act.
The capital gains tax exemption limit is restricted to INR 10 crores.
The capital gains on the transfer of the original house property are taxable in the year in which it is sold.
Section 54F exemption allows tax exemption on long-term capital gains earned from selling a capital asset other than a house property.
The difference between section 54 and section 54F is that section 54 is available for long-term capital gains on the sale of residential houses; however, section 54F is available for long-term capital gains on the sale of any asset other than residential houses.
You can claim exemption on all capital gains or up to the cost of a new residential property, whichever is less.
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