How to save Capital Gains Tax on Sale of Land / House Property?
Capital assettypically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.
Examples include a house, land, household furnishings, stocks, bonds or mutual funds held as investments etc.,
When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a capital gain or a capital loss. Capital gains and losses are classified as long-term or short-term.
If Land or house property is held for 36 months or less24 months or less(w.e.f. FY 2017-18)then that Asset is treated as Short Term Capital Asset. You as an investor will make either Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL)on that investment.
If Land or house property is held for more than 36 monthsmore than 24 months(w.e.f FY 2017-18 / AY 2018-19) then that Asset is treated as Long Term Capital Asset. You will make either Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL) on that investment.
You may have to pay Capital Gains Tax on STCG / LTCG.
In this post let us understand – How to calculate Short Term capital gains on sale of land or property? How to calculate Long Term Capital Gains on sale of land or house? What are the applicable capital gain tax rates on sale of land / house property? How to avoid / save / minimize capital gains tax on sale of land or flat?
How to calculate Capital Gains on sale of Land or House property?
Short Term Capital Gains Calculation is calculated as below:
STCG = Total Sale Price – Cost of acquisition – expenses directly related to sale – cost of improvements.
Long Term Capital Gains Calculation;
The LTCG calculation is similar to STCG. The only differences are, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price and also claim certain exemptions to save capital gains tax.
With effective from Financial Year 2017-18, the base year for calculation of Indexation is going to be 2001.
(Indexation is done by applying CII – cost inflation index. This increases your cost base ie purchase price and lowers your gains. Your purchase price is adjusted for the impact of inflation.
How do you calculate the indexed cost of purchase? The indexed cost is calculated with the help of a table of cost inflation index.
Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.
For Example : If purchase year is 2011 and year of sale is in Financial Year 2015. Then indexed cost of purchase would be –
Below is the Cost Inflation Index Table from 2001-02 to FY 2020-21 for your reference. Cost Inflation Index (CII) for FY 2020-21/ AY 2021-22 Notified by CBDT at 280.
What are the applicable Capital Gains Tax Rates on Sale of Property AY 2021-22?
Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
Long Term Capital Gains are taxed at 20%.
How do I save Capital Gains Tax from sale of Property?
Capital gains tax on Short term gains is unavoidable and no exemptions are available to minimize your tax liability. However, you can claim deductions to lower the tax liability on long-term gains.
How to save Capital Gains Tax by claiming Exemption u/s Section 54EC? (Applicable to LTCG only, on sale of both land / house property / commercial property)
Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset.
These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.
The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
These are redeemable after 3 years and must not be sold before the lapse of 3 years from the date of sale of the house property. The Bonds issued u/s 54EC for saving of LTCG on sale of property will now have a lock-in period of 5 years instead of 3 years from FY 2018-19.
You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).
You can invest a maximum of Rs 50 lakhduring a financial year in these bonds as per Budget 2015-16.
How to save Capital Gains Tax by claiming Exemption u/s Section 54? (Applicable to LTCG on sale of house property only)
You can use the entire Long Term Capital Gain proceeds on sale of a residential house to buy another house property (residential property) to save Capital Gains tax. Below conditions need to be satisfied though;
The new house has to be bought one year before(under-construction property) the transfer of the first house or within two years after the sale. (For an Under construction property or flat , the construction has to be completed within three years of the transfer of the first property.)
The deduction allowed is equal to the actual investment or the capital gain, whichever is lower.
If you plan to use the gain to build a house, it has to be done within three years of the sale of the property. Do note that ‘cost of land’ can be included in the construction cost.
How to save Capital Gains Tax u/s 54F?(Conditions applicable to LTCG on sale of Land or Commercial Property)
Below conditions need to be satisfied in case you sell land and are planning to buy a residential home.
You can use the entire sale proceeds (received by selling a plot / land) to buy a new house or to build a new residential house.
If you use a part of the money, the deduction will be proportion of the invested amount to the sale price.
The time-frame for investment is the same as that for capital gains from residential property.
You should not own more than one residential house prior to this investment.
The deducted capital gain (from sale of land) becomes taxable if you buy another house (other than the new one) within two years of the transfer of the original asset or construct a new one within three years.
If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
This new house purchased or constructed must be situated in India.
The proceeds should not be invested in a commercial propertyor in another vacant plot.
How to Save Long Term Capital Gains Tax without buying another House Property?
If you are unable to invest the sale proceeds in any of the above options before the date of income tax returns filing , you can deposit the CAPITAL GAINS (not entire sale proceeds) amount in a public sector bank or other banks as per the Capital Gains Account Scheme- CGAS, 1988.
The capital gain (full amount or utilized amount)can be deposited in CGAS account.
This is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.
The deposited money can be used only to buy or construct a residential house within the prescribed time frame.
If you withdraw funds from this account, they have to be used within 60 days.
If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.
The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.
How to Save Long Term Capital Gains Tax under New Section 54GB(5)?
Under Section 54GB(5) of the Income Tax Act, 1961, long term capital gains on the sale of residential property will be exempt if the sale proceeds are invested in a eligible startup, provided such transfer took place prior to March 31, 2019. As per the latest full Budget 2019-20, this has now been extended to March 2021.
Important points on Capital Gains Tax & Sale of Land / Home
Agricultural land in a rural area in India it is not considered a Capital Asset, and therefore no capital gains are applicable on its sale.
While calculating capital gains, expenses related to transfer / sale like advertisement expenses, brokerage expense, Stamp duty, Sale deed registration fees, Legal (lawyer) expenses etc., can be deducted from the Purchase price.
Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven’t spent any money to acquire it. In such a case, capital gains will be computed on the basis of the cost to the previous owner, indexed to the year of purchase.
If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately.
The new property must only be bought on the name of the seller and not on anybody else’s name. Joint ownership can be acceptable but exemption can be limited to the share of ownership.
You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitionsand thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
If you use the capital gain amount to clear loansthen tax on LTCG cannot be saved. No exemptions can be claimed.
Capital Gain Tax cannot be saved if the sale proceeds are invested in a commercial property, agricultural land or plot.
According to the latest amendments in the Income Tax Act, the residential property which is bought by re-investing the long-term capital gains must be situated in India.If you would like to buy a property outside India say in the US, you need to pay tax on the capital gain portion of the sale proceeds.
Categorize your capital gains i.e., Short term or Long term.
Calculate Short Term Capital Gains (STCG) / Long Term Capital Gains (LTCG).
If you have STCG, taxes are payable as per your income tax slab rate.
If you have LTCG, to save capital gains tax ;
You may invest the gains in another Residential property (or)
Buy Notified Bonds (or)
Temporarily invest in Capital Gains Account Schemes.
Else, you have to pay 20% on your Long Term Capital Gains.
Calculation of Capital Gains Tax on sale of property can be sometimes be a tricky one. It is advisable to exercise caution when claiming Capital Gains Tax Exemptions. When in doubt, kindly consult a tax expert or a Chartered Accountant.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
This post was last modified on September 28, 2023 6:32 pm
Sreekanth Reddy
Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 14 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. The information provided, therefore, should not be viewed as financial, legal, accounting, tax or investment advice."
Dear Sir,
I purchased a plot for 1350000 in 2017. Now I have purchased another plot for 1850000 for construction of house after taking loan. Now I want to sell my old plot at 1400000 in urgency...how will it be taxed....pls guide
Dear sachin,
Rs 50,000 is a Short term Capital Gains as the period of holding of first plot is less than 2 years. So, no tax exemption can be claimed on STCG.
Dear Sir, Under section "To summarize" it is written:
"You may invest the gains in another residential property". Here may I take that the word "gains" means the entire sale proceeds ?
Next sentence says "Buy Notified Bonds" and here may I assume that we buy for the amount equal to the actual Capital Gain only and not the entire proceeds !
I am an uninitiated person and thoroughly confused by the nomenclature used. Pls clarify ! Thanks.
Dear Tom,
Under Section 54F, it relates to entire Sale proceeds.
Sec 54, it is Long Term Capital Gain sonly.
Sec 54EC which pertains to Bonds relate to LTCG only and not entire sale proceeds.
Thanks Mr Sreekant Reddy, It is finally clear to me,Tom
Hi
I purchased a flat in 1997 for 6 lacs and sold it forv42 lacs in January 2018. Please let me know as how to save capital gain tax ? How much will it be ?
Dear Ajay,
Kindly go through above article on the options to save LTCG tax.
For exact CG calculations, suggest you to consult a CA.
Hi sreekanth.
Nice to meet u.
I am not able to get purchasers to sell my commercial site which is 30,000 sq feet plus a house and 6 shops.You know why? It is because of tax which they don't want to pay.Kindly tell me NRIs are exempted to pay taxes when they come forward to purchase my propperty?
Dear Ramamoorthy ..May I know your exact query?
Hello,
I had a purchased a flat at 4.5 Lac in 2014, in which my elder brother was a joint owner as well.
In March 2018 I have sold that flat for an amount of 8 lac.
All amount was credited only in my bank account through cheque & cash deposit
Now i want to File my return this year to claim my tds deducted from my salary & want to save my capital gains under section 54 of IT since I'm buying a new flat for which I'll be the only owner
Am I eligible to file my return under section 54. Please advise
Dear SUMIT,
As the old property (sold one) was in joint-names, I believe that you can claim LTCG tax exemption to the extent of your ownership share in that property, if you invest the proceeds in the buying a new property.
Hello
My father wanted to sell his ancestral property and buy another property in his daughter’s Name
Please can you tell me does this come under tax free or taxable
Dear Dhristi,
Your father will be able to sell an ancestral property after getting the consent from all the Legal heirs only.
In case, he sells his share in the property with the consent, he is liable to pay tax on Long term Capital Gains (if any).
So, it is advisable to buy the property in his name, this can enable him to avail tax exemption on LTCG (subject to certain conditions as given in the above article) and then he can GIFT the property to his daughter.
I had a plot (not agricultural) which I sold for Rs. 40 lacs. I received LTCG of Rs.28 lacs which I invested in a residential flat. Can I claim exemption of capital gain? If yes then under which section of 54?
Dear Harsh,
Deduction under section 54F :
If you sell land and make long-term capital gains, you can re-invest entire sale proceeds to purchase a residential house within 1 year before or 2 years after from the date of sale of land or you should construct the residential house within 3 years from the date of sale.
You should not own more than one residential house on the date of transfer of land.
Hi
I have purchased a plot in 2010 for 2.5 lakhs and constructed a house on it for 38 lakhs. I have lost all the bills pertaining to construction to prove the cost of construction. I am planning to sell the property. Please guide as to how to calculate the cost of property for taxation purpose.
Dear Ajith,
Kindly consult a CA.
Dear Sreekanth,
My parents were living in a bungalow in Mumbai. In the same plot, my uncle too had a bungalow. The plot was and both the bungalows were in my uncles name. Though we were the rightful owners of 1/3rd of the plot, my uncle had refused to transfer 1/3rd of the plot in my fathers name , hence the whole plot and both the bungalows were in my uncle's name. My uncle died in 2007. His son, my cousin, put the plot for re-development and we got two flats in the new building which came up on the plot. My cousin made the 2 flats in my mothers name. My mother has gifted one of the flats to me. I intend to sell this flat.
My question is :- How will long term capital gains be computed? My parents have been occupying the bungalow since 1964 and for a few years it was given on rent when they had relocated to another city and later came back to stay at the bungalow. My uncle has given the 2 flats as a gift(i do not know the terminology used , something like due consideration or kind consideration .....).
How will long term capital gains be computed if I sell the flat now?
thanx
Suggest you to kindly consult a CA as well in this regard..
Hi Sree
Couple of queries on LTCG of property.
1. Cost of acquisition: I had paid a brokerage of 2% amounting to Rs. 44000. Also incurred Lawyer and Documentation expenses of Rs. 12000 back in 2010 while purchasing the property. There are no receipts for these. Could I still add these expenses to my cost of acquisition while calculating LTCG? Generally does the ITO ask to furnish for any evidences for these nominal costs?
2. Are property taxes paid year on year deductable under "Expenses on property" while calculating LTCG?
3. I had made some repairs in my property year by year (again no receipts or bills for these) totalling upto Rs.150000 in 7 years. Can I show these up under the head "Cost of improvements carried out in the property"? Or does it have to be a real 'improvement' resulting in any 'value-add' to the property? Kindly clarify asap.
Dear Vivek,
1 - These expenses can be claimed. But, in case there is a scrutiny after filing your ITR, you may have to show the documentary evidence for these costs.
2 - These come under the head 'income from house property'.
3 - same as point '1'.
Suggest you to kindly consult a cA.
View Comments
Dear Sir,
I purchased a plot for 1350000 in 2017. Now I have purchased another plot for 1850000 for construction of house after taking loan. Now I want to sell my old plot at 1400000 in urgency...how will it be taxed....pls guide
Dear sachin,
Rs 50,000 is a Short term Capital Gains as the period of holding of first plot is less than 2 years. So, no tax exemption can be claimed on STCG.
Dear Sir, Under section "To summarize" it is written:
"You may invest the gains in another residential property". Here may I take that the word "gains" means the entire sale proceeds ?
Next sentence says "Buy Notified Bonds" and here may I assume that we buy for the amount equal to the actual Capital Gain only and not the entire proceeds !
I am an uninitiated person and thoroughly confused by the nomenclature used. Pls clarify ! Thanks.
Dear Tom,
Under Section 54F, it relates to entire Sale proceeds.
Sec 54, it is Long Term Capital Gain sonly.
Sec 54EC which pertains to Bonds relate to LTCG only and not entire sale proceeds.
Thanks Mr Sreekant Reddy, It is finally clear to me,Tom
Hi
I purchased a flat in 1997 for 6 lacs and sold it forv42 lacs in January 2018. Please let me know as how to save capital gain tax ? How much will it be ?
Dear Ajay,
Kindly go through above article on the options to save LTCG tax.
For exact CG calculations, suggest you to consult a CA.
Hi sreekanth.
Nice to meet u.
I am not able to get purchasers to sell my commercial site which is 30,000 sq feet plus a house and 6 shops.You know why? It is because of tax which they don't want to pay.Kindly tell me NRIs are exempted to pay taxes when they come forward to purchase my propperty?
Dear Ramamoorthy ..May I know your exact query?
Hello,
I had a purchased a flat at 4.5 Lac in 2014, in which my elder brother was a joint owner as well.
In March 2018 I have sold that flat for an amount of 8 lac.
All amount was credited only in my bank account through cheque & cash deposit
Now i want to File my return this year to claim my tds deducted from my salary & want to save my capital gains under section 54 of IT since I'm buying a new flat for which I'll be the only owner
Am I eligible to file my return under section 54. Please advise
Dear SUMIT,
As the old property (sold one) was in joint-names, I believe that you can claim LTCG tax exemption to the extent of your ownership share in that property, if you invest the proceeds in the buying a new property.
You may kindly consult a CA as well.
Related Article : Long Term Capital Gain Exemptions on Sale of Property & Recent Court Judgments
Hello
My father wanted to sell his ancestral property and buy another property in his daughter’s Name
Please can you tell me does this come under tax free or taxable
Dear Dhristi,
Your father will be able to sell an ancestral property after getting the consent from all the Legal heirs only.
In case, he sells his share in the property with the consent, he is liable to pay tax on Long term Capital Gains (if any).
So, it is advisable to buy the property in his name, this can enable him to avail tax exemption on LTCG (subject to certain conditions as given in the above article) and then he can GIFT the property to his daughter.
Kindly go through related articles :
* What is Ancestral Property? | Definition & Important Legal rules
* Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
* Got a Gift? Find out, if it is Taxable or Tax-free?
I had a plot (not agricultural) which I sold for Rs. 40 lacs. I received LTCG of Rs.28 lacs which I invested in a residential flat. Can I claim exemption of capital gain? If yes then under which section of 54?
Dear Harsh,
Deduction under section 54F :
If you sell land and make long-term capital gains, you can re-invest entire sale proceeds to purchase a residential house within 1 year before or 2 years after from the date of sale of land or you should construct the residential house within 3 years from the date of sale.
You should not own more than one residential house on the date of transfer of land.
Kindly read : Agricultural Income & Sale of Agricultural land : Tax Treatment, Computation & Implications
Hi
I have purchased a plot in 2010 for 2.5 lakhs and constructed a house on it for 38 lakhs. I have lost all the bills pertaining to construction to prove the cost of construction. I am planning to sell the property. Please guide as to how to calculate the cost of property for taxation purpose.
Dear Ajith,
Kindly consult a CA.
Dear Sreekanth,
My parents were living in a bungalow in Mumbai. In the same plot, my uncle too had a bungalow. The plot was and both the bungalows were in my uncles name. Though we were the rightful owners of 1/3rd of the plot, my uncle had refused to transfer 1/3rd of the plot in my fathers name , hence the whole plot and both the bungalows were in my uncle's name. My uncle died in 2007. His son, my cousin, put the plot for re-development and we got two flats in the new building which came up on the plot. My cousin made the 2 flats in my mothers name. My mother has gifted one of the flats to me. I intend to sell this flat.
My question is :- How will long term capital gains be computed? My parents have been occupying the bungalow since 1964 and for a few years it was given on rent when they had relocated to another city and later came back to stay at the bungalow. My uncle has given the 2 flats as a gift(i do not know the terminology used , something like due consideration or kind consideration .....).
How will long term capital gains be computed if I sell the flat now?
thanx
Dear purushotham,
Is this an ancestral property?
Kindly read : What is Ancestral Property? | Definition & Important Legal rules
Though your parents have been residing in the said bungalow, it is not in their name.
Has your cousin gifted the property (Flats) to your parents?
Then, kindly go through below articles for some clarity @
Got a Gift? Find out, if it is Taxable or Tax-free?
Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
Suggest you to kindly consult a CA as well in this regard..
Hi Sree
Couple of queries on LTCG of property.
1. Cost of acquisition: I had paid a brokerage of 2% amounting to Rs. 44000. Also incurred Lawyer and Documentation expenses of Rs. 12000 back in 2010 while purchasing the property. There are no receipts for these. Could I still add these expenses to my cost of acquisition while calculating LTCG? Generally does the ITO ask to furnish for any evidences for these nominal costs?
2. Are property taxes paid year on year deductable under "Expenses on property" while calculating LTCG?
3. I had made some repairs in my property year by year (again no receipts or bills for these) totalling upto Rs.150000 in 7 years. Can I show these up under the head "Cost of improvements carried out in the property"? Or does it have to be a real 'improvement' resulting in any 'value-add' to the property? Kindly clarify asap.
Dear Vivek,
1 - These expenses can be claimed. But, in case there is a scrutiny after filing your ITR, you may have to show the documentary evidence for these costs.
2 - These come under the head 'income from house property'.
3 - same as point '1'.
Suggest you to kindly consult a cA.