Income Tax

How to save Capital Gains Tax on the Sale of Land?

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.

What is Capital Gains Tax in India?

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:-

• You sell an asset that comes under the capital asset category.
• You have gained profit from the sale.
• The sale is made in the previous year, viz., the financial year.

Short-term or Long-term capital gains

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 of calculating Capital Gains

The process to arrive at Short Term Capital Gains (STCG):-

Particulars	Amount
Total Selling Price	XX
Less:
Cost of Acquisition	(XX)
Expenses directly related to the sale	(XX)
Exemption under sections 54B, 54D, 54G, 54GA	(XX)
Short-term Capital Gain	(XXX)

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.

Particulars	Amount
Total Selling Price	XX
Less: Indexed Cost of Acquisition	(XX)
Less: Expenses directly related to the sale	(XX)
Less: Exemption: Section 54B, 54D, 54EC, 54F, 54G, 54GA	(XX)
Less: Long-term Capital Gain	(XXX)

What are the Tax Rates?

• STCG is included in your taxable income and taxed at applicable slab rates.
• LTCG is taxed at the rate of 20%, along with indexation benefits.

How to save tax on the sale of land?

Section 54F (applicable on long-term capital assets)

Capital gains exemption can be claimed if you satisfy the following conditions:-

• The exemption applies only to companies, LLPs or firms and not to an Individual or HUF.
• The new house should be located in India.
• Purchase a house within one year before the date of land sale or within two years after the sale.
• Construct the house within three years from the date of the sale of the land.
• The house should not be sold within three years from the date of purchase or construction.
• On the date of transfer, you should own only one residential house, excluding the new one.

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.

Investing in Capital Gains Account Scheme

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 31^st 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.

Section 54EC (applicable to long-term capital asset) – Purchasing Capital Gains Bonds

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:-

• Rural Electrification Corporation Limited or REC bonds,
• National Highways Authority of India or NHAI bonds,
• Power Finance Corporation Limited or PFC bonds,
• Indian Railways Finance Corporation Limited or IRFC 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.

Conclusion

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.

FAQs

1. https://incometaxindia.gov.in/charts%20%20tables/cost-inflation-index.htm