How to save Capital Gains Tax on Sale of Land
Posted on October 01 2020
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Did you sell a plot of land? Land is basically a CapitalAsset. Therefore, Agricultural land in a rural area in India it is not considered as a Capital Asset, and there are no capital gains applicable on its sale. Before we go deep into how capital gains shall be taxed, do make sure that your Income Tax considers your asset to be a capital asset.
Is this a Short Term or Long Term Capital Asset -
Once you are sure that you have sold a Capital Asset? Firstly, you are required to check whether this is a long term or short term capital asset. If the land is held for less than 36 months then it is termed as short term capital asset, but if it is the cost of acquisition, expenses directly to sale, cost of improvement if there is any, also deduct the exemptions which is allowed under the section 54 as applicable. The result amount is Short Term Capital Gains.
Once you are sure that you have sold a Capital Asset? Firstly, you are required to check whether this is a long term or short term capital asset. If the land is held for less than 36 months then it is termed as short term capital asset, but if it is the cost of acquisition, expenses directly to sale, cost of improvement if there is any, also deduct the exemptions which is allowed under the section 54 as applicable. The result amount is Short Term Capital Gains.
In case of Long Term Capital Assets, the only difference is that one is allowed to deduct the Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price. Indexation is done by applying the Cost Inflation Index or CII. This increases the cost base and lowers your gains, since the buying price is adjusted for the impact of inflation.
What are the Tax Rates
Short Term Capital Gains are included in your taxable income and are taxed on the applicable tax rates based on your slab where as for Long Term Capital Gain is taxed at 20%.
Short Term Capital Gains are included in your taxable income and are taxed on the applicable tax rates based on your slab where as for Long Term Capital Gain is taxed at 20%.
Exemptions from your Gains that Save Tax
Section 54F (applicable in case it’s a long term capital asset) – If you are using your entire sale proceeds to purchase a house property then you may end up paying no tax on your gains when you satisfy all the following conditions
Section 54F (applicable in case it’s a long term capital asset) – If you are using your entire sale proceeds to purchase a house property then you may end up paying no tax on your gains when you satisfy all the following conditions
(a) You buy ONE house within 1 yr before the transfer date or 2 yrs after the transfer, or constructing ONE house within 3 yrs after the transfer date.
(b) You do not sell this house within 3 yrs of buying or constructing
(c) This new house bought or constructed must be situated in India
(d) You should not own more than 1 residential house, other than the new one on the date of transfer
(e) You do not buy within a period of 2 yrs after such date or construct within a period of 3 years after such date of any residential house, other than the new one.
When you satisfy these conditions and invest the entire sale proceeds towards the new house where you are not required to pay any tax on your capital gains. Therefore, if you invest a portion of the sale proceeds, the exemption will be the proportion of the invested the amount to the sale price or exemption = cost of the new house x capital gains/net consideration.
By Investing in Capital Gains Account Scheme – Finding a suitable seller, arranging the essential funds and getting the paperwork in the place for a new property is one time consuming process. Fortunately, the Income Tax agrees with these conditions. As per the Capital Gains Account scheme, 1988, if you have sold your property and have not been able to invest your capital gains until the date of filing the income tax return by 31st July of the financial year in which it was sold then you are allowed to deposit your gain in either PSU Bank or other banks. And while filing your income tax return make sure you claim this as an exemption from your capital gains so that you are not required to pay any taxes on it. Therefore, you are required to deposit the money at a specific time period given by the bank or else it will be considered to be capital gains, if you fail to do so.
Section 54EC (applicable in case it’s a long term capital asset)–Purchasing Capital Gains Bonds – What will happen if you do not want to purchase another property, there is no requirement to invest the amount in a Capital Gains Account Scheme. In such a case, you can still save the tax on your capital gains by investing them in certain bonds. Bonds which are issued by the National Highway Authority of India (NHAI) or Rural ElectrificationCorporation (REC) have been specified for this purpose. These are amendable after 3 years and should not be sold before the lapse of 3 years from the sale of the property. You are allowed a period of 6 months to invest in these bonds, yet to claim this exemption, you are required to invest before the income tax return filing date. The Budget for 2014 has been specific that you are allowed to invest a maximum of Rs 50 lakhs in a financial year in these bonds.
TaxAssist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.
With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.
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