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- How to Save Capital Gains Tax on Sale of Land?
Updated on: 01 Jan, 1970 05:30 AM
Budget 2024 Updates
Amendment to Finance Bill 2024
Earlier, the government removed the indexation benefit on the sale of immovable property. However, the amendment of Finance Bill 2024 introduced a rollback of this rule.
As per the latest amendment, for any immovable property acquired before 23rd July 2024, the taxpayers will have the option to choose between two LTCG computation methods -
- 12.5% tax rate, without indexation
- 20% tax rate with indexation benefit.
The taxpayers can compute their tax based on both these methods and select the one that reduces their tax burden.
In other words, now taxpayers will be able to claim the benefit of indexation if they choose to pay tax at 20%. They will also get the opportunity to save tax by choosing the method of computing taxes.
However, there are certain exceptions to this amendment -
- Indexation benefit is only available on immovable property like land and buildings.
- It is available only to individuals and HUFs and not to firms or companies.
- It can be considered only for tax calculation and not for determining amount of investment or loss to claim exemption or carry forward.
Long-term capital gains
- Exemption on LTCG has been increased from Rs.1 lakh to Rs.1.25 lakhs per annum.
- LTCG rate on all financial as well as non-financial assets has been increased to 12.5%.
Short-term capital gains
- STCG on specified financial assets will be charged at 20%.
- STCG on other non-financial assets will be taxed at applicable slab rates.
- Unlisted bonds and debentures, debt mutual funds, and market linked debentures, irrespective of holding period, however, will attract tax on capital gains at applicable rates.
- To know more about it, contact our tax experts
Any person who possesses property in India is required to pay taxes on the profits generated from their capital assets. However, there are schemes and strategies available to help minimize the tax burden on capital gains on sale of land. This guide will explore these methods and schemes and also help you understand how to calculate capital gains tax on land in India. But before delving into that, let’s gain an understanding of the types of capital gains and the capital gain exemption on the sale of land
Contents
- What are Short-Term and Long-Term Capital Gains?
- How to Calculate Capital Gains on Sale of Land in India?
- How to Calculate Capital Gains Tax on land in India?
- How to Save Capital Gains Tax on Sale of Land
- What are STCG and LTCG Tax Rates?
- Tax Exemption on Sale of Land
- Capital Gain Account Scheme
- Maximizing Capital Gains Tax Savings: Beyond CGAS
- FAQs on How to Save Capital Gains Tax on Sale of Land
What are Short-Term and Long-Term Capital Gains?
The taxation of capital gains hinges on whether they are deemed long-term or short-term. If an individual owned the land for less than 24 months before selling it and earned a profit, it is considered a short-term capital gain. On the other hand, if the land is held for more than 24 months, it falls under the category of long-term capital gain.
How to Calculate Capital Gains on Sale of Land in India?
Before we learn how to calculate capital gains on sale of land, let’s understand a few terms as described in below table:
| Terms | Description |
|---|---|
| Cost of acquisition | This includes the expenses incurred and the original purchase price of the land. |
| Cost of improvement | You can add the renovation cost to the land during the holding period to the land acquisition cost. |
| Selling price | The selling price is the actual amount received from the land transfer. It is crucial to account for any deductions, such as brokerage fees or other expenses directly associated with the sale. |
Tax Rate on Capital Gains
| Tax Type | Condition | Applicable Tax |
|---|---|---|
| Long-term capital gains tax (LTCG) | Sale of:
| Till 1 lakh-Exemption 10% over and above Rs 1 lakh |
| Others | 20% | |
| Short-term capital gains tax (STCG) | When Securities Transaction Tax (STT) is not applicable | Normal slab rates |
| When STT is applicable | 15%. |
How to Calculate Capital Gains Tax on land in India?
Calculation of Long term Capital Gain -
| Particulars | Amount |
|---|---|
| Total Selling Price | 1,000,000 |
| Less: | |
| Indexed cost of acquisition Expenses directly related to sale and improvement (e.g., brokerage) Exemption under Sections 54B, 54D, 54EC, 54F, 54G, or 54GA (if applicable | 709,090.91 xx xx |
| Long-term capital gains | xxx |
Note: The long term capital gains on the sale of land calculated above are subject to tax as specified under the Income Tax Act.
How to Save Capital Gains Tax on Sale of Land
You can save tax on capital gains on land if you invest the amount after selling the land to purchase a house property or construct a new one. You can claim capital gains exemption on sale of land if certain conditions are met.
- To claim this capital gains exemption under Section 54F, you must be an individual or Hindu Undivided Family (HUF). Companies, Limited Liability Partnerships (LLPs), and other business entities are not eligible.
- The new residential property should be located within India and acquired within the prescribed timeframe:
- Purchase: within one year before or two years after the date of land sale.
- Construction: commencement within three years of the land sale date.
- The new property must be held for at least three years after purchase or construction to qualify for the exemption.
- On the date of transfer, the taxpayer shall not own more than one residential property, excluding the newly acquired/constructed one.
- Investing the entire sale proceeds in the new property allows you to claim the full capital gains exemption on sale of land. The exemption is proportionately reduced based on the investment ratio if only a portion is invested.
Agricultural land in rural areas is not considered a capital asset. Therefore, capital gains from agricultural land situated in rural areas of India are not subject to tax. However, if the agricultural land is situated in urban area, it might be subject to tax.
What are STCG and LTCG Tax Rates?
- STCG forms part of your overall income. It is added to your gross total income and taxed at the applicable slab rates for FY 23-24.
- Long term capital gains, or LTCG, is taxed at 20% with the benefit of indexation.
Note: The benefit of indexation is not allowed on short-term capital gains.
Tax Exemption on Sale of Land
Given below are the sections under which you can claim capital gain exemption on the sale of land in India -
| Section | Exemption |
|---|---|
| Section 54F | Claim this exemption when using proceeds from land sale to buy a new house property. |
| Section 54EC | Claim when using proceeds to purchase specific notified bonds. |
| Section 54B | Claim when proceeds from urban agricultural land sale are reinvested in another agricultural land. |
| Section 54D | Capital gains on sale of land from compulsory acquisition reinvested in setting up another industrial undertaking. |
| Section 54G | Exemption for capital gains when shifting industrial undertaking from urban to rural areas. |
| Section 54GA | Exemption for capital gains when shifting industrial undertaking from urban to special economic zones. |
Capital Gain Account Scheme
Investing capital gains within the deadline to qualify for exemption can be challenging due to complexities in property acquisition. Recognizing this, the Income Tax Department offers the Capital Gains Account Scheme (CGAS). This scheme allows taxpayers to deposit their capital gains, even if they haven't yet identified an investment property, and claim exemption from capital gains tax on sale of land when filing their return by July 31st.
Maximizing Capital Gains Tax Savings: Beyond CGAS
If you're not planning to buy another property, investing in the CGAS (Capital Gains Account Scheme) isn't the only way to save capital gains tax on sale of land. You can also invest in specific tax-exempt bonds like REC, NHAI, PFC, or IRFC bonds. These bonds mature after five years and can't be sold before three years from the property sale date. You have six months to invest (but must do so before filing your tax return). The maximum investment in these bonds is Rs.50 lakhs per year.
Not just this, there are various hacks to save tax on capital gains. Our tax experts can help you navigate the provisions of Income tax law and help you maximize your capital gains tax savings. Hire an online CA from Tax2win to get end-to-end ITR filing solutions and tax planning services.
FAQs on How to Save Capital Gains Tax on Sale of Land
Q- How do I avoid capital gains after selling land?
Capital gains deriving from the sale of a residential property can be exempt from tax under Section 54 of the Income Tax Act, 1961, provided the capital gains are reinvested in purchasing or constructing another residential property within a specified timeframe. The investment in the new property must be made either one year before the sale or two years after the sale of the original property.
Q- Where to invest capital gains from sale of land?
Section 54EC of the Income Tax Act offers an alternative route for capital gains tax optimization. This involves investing the capital gains in designated bonds issued by institutions such as REC, NHAI, PFC, and RFC. Such investments facilitate the deferment of tax liability on capital gains for a period of five years, potentially resulting in tax savings in the long term.
Q- How to avoid capital gains tax on sale of land?
To save on capital gains tax from the sale of land, you can utilize an exemption by purchasing another piece of agricultural land within two years of the sale. This allows the capital gain equivalent to the value of the new land to be exempt from taxation.
Q- How much capital gain is tax-free?
When you sell an asset for more than you paid for it, the difference is called a capital gain. In India, you only pay tax on capital gains exceeding Rs. 1 lakh annually. The tax rate is 10% (plus cess and surcharge) on the amount that goes above Rs. 1 lakh.
Q- Is it compulsory to open capital gain account?
No, it is not compulsory to open a capital gain account. However, individuals who fail to reinvest their capital gains within the stipulated time can secure their capital gain tax exemption by opening a CGAS account and parking their capital gains in it.
Q- When capital gain account can be closed?
In order to withdraw funds from CGAS, individuals must provide their details in Form G along with necessary documents directly to the Assessing Officer (AO). Upon verifying that all documents are correct and the applicable tax on the deemed capital gain is paid, the AO will then approve Form G.
Q- Do I need to pay TDS on property sale?
Here are the provisions related to TDS on the sale of property under the Income Tax Act, of 1961.
- The buyer is responsible for deducting TDS on the property, not the seller.
- TDS is not applicable under Section 194IA if the transaction value is less than Rs.50 lakh.
- TDS on the property should be paid on the entire sale amount, not just the portion exceeding Rs.50 lakh.
Q- What did Budget 2024 propose in regard to removal of indexation benefits for properties.
The Budget 2024 has proposed removing indexation benefits on capital gains from the sale of long-term capital assets. Previously, property owners adjusted their purchase prices for inflation, reducing taxable profits. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5%. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit.
Individuals can still use the fair market value (FMV) as the cost of acquisition for assets purchased on or before April 1, 2001, when selling these assets.
The amendment to Finance Bill 2024 announced the restoration of indexation benefits on immovable property purchased before 23rd July 2024 for individuals and HUFs only for the purpose of computing tax. In other words, individuals can now choose between a 12.5% tax rate without an indexation benefit and a 20% tax rate with an indexation benefit.
Q- Is investing in another house property the only way to save LTCG tax on the sale of property? If not explain the other ways and how it works?
If you reinvest your capital gains in another property within a specified time period, you can claim an exemption under the following sections -
- Section 54: If the gains from selling a residential house are reinvested in another house property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount is exempt from tax.
- Section 54F: If the gains from selling any long-term asset are reinvested in a residential property within 1 year before or 2 years after the sale date, or if the new property is constructed within 3 years from the sale date, the entire amount can be claimed as a tax exemption.
However, there are other ways to save tax on LTCG from sale of property too. Given below are the alternative methods -
- Section 54EC Exemption: Invest capital gains in NHAI, REC, IRFC, or PFC bonds within 6 months of the sale for full tax exemption.
- Section 54GB Exemption: Reinvest proceeds from the sale of residential property into eligible start-ups within the specified timeframe to claim an exemption.
- Capital Gains Account Scheme (CGAS): If you can't invest in a new property immediately, deposit the gains in CGAS. The amount must be reinvested in a new house within 2 years to maintain the exemption. If not used within this period, the LTCG will be taxed in the year the gains were realized.
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CA Abhishek Soni
Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.
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