Land Sale Capital Gains Tax

Any profit or gain from selling a capital asset is known as capital gain. Houses, land, stocks, mutual funds, jewelry, and trademarks are all capital assets. Because the gain/profit is considered income, you must pay tax on that amount in the same year you transferred the capital asset. 

As a taxpayer, you must pay taxes on your earnings during the fiscal year. Similarly, you also have to pay taxes on your capital gains. 

Because land is a capital asset, capital gains from its sale are taxed. Here’s a detailed explanation of capital gains tax and how to calculate it. 

Capital Gains Tax on Land Sales 

You must pay capital gains tax on a home or land sale. Capital gains tax falls into two types: short-term capital gains (STCG) for properties held for less than 36 months and long-term capital gains (LTCG) for properties kept for more than 36 months.  

In the case of STCG, the profits generated from the sale of land belong in the owner’s taxable income, and the individual must pay taxes based on the income tax slab they fall into that particular fiscal year. The current LTCG tax rate is 20%. 

How to Count Capital Gain on Land Sale? 

Here’s how to figure out the capital gains from selling a house: 

Capital Gain Tax (STCG) 

Deduct the acquisition cost, improvement cost(if any), and sale-related expenses from the sale price if you sell the land within 36 months of purchasing it. It will be your STCG. 

Let’s take a look at an example- 

Mr. Ansari purchased land in 2015. He paid Rs. ten lakh for it. Mr. Ansari bought land in 2015. He paid Rs. 10 lakh for it. In 2016, he sold the land for Rs. 15 lakh. In this instance, Mr. Ansari’s total income will rise by Rs.5 lakh. Tax will be lived based on his tax bracket. Calculating the STCG tax is easier. The profit from the sale of land is part of the total income.  

LTCG – Capital Gains Tax 

In LTCG, you can deduct the indexed acquisition and improvement costs from the sale price. It helps to reduce your capital gains as the cost of acquisition or improvement rises.  

When calculating LTCG, the cost inflation index (CII) is critical. Every year, the government releases this index. CII is an integral factor in determining the indexed cost of acquisition and improvement. 

Cost Inflation Index = Index for the fiscal year of transfer/ Index for the fiscal year of acquisition. 

Are Deductions for Reducing Capital Gains Tax Available? 

Yes, the IT Act provides a few options to help landowners reduce their capital gains tax liability. Some of the most popular ones are as follows- 

Section 54F of Income Tax 

Under Section 54F, there is a 100% deduction on the capital gains tax if the entire amount is gained from selling land for purchasing or constructing a house. However, this provision is subject to certain conditions and limitations. But note that there are some conditions and limitations to this provision. 

Income Tax Section 54EC 

The LTCG from the land sale is deductible under Section 54EC when invested in capital gains bonds such as REC (Rural Electrification Corporation) or NHAI (National Highway Authority of India). Furthermore, if you don’t use these sections of the IT Act, you can deposit your capital gains in a bank. Such capital gains deposits are tax deductible under the Capital Gains Account Scheme. 

Tax Advice for House Sellers 

  • Generally, the exemption for a new residential property is proportional to its total sale price. Investing the remaining amount within six months is allowed under Section 54EC. 
  • The exemption will also be available if the builder of the new residential property does not hand over the house to the taxpayer within three years of purchase. 
  • You can calculate the capital gains by using the stamp duty and valuation by the registration authority. 
  • If the seller cannot reinvest the gains in bonds or houses before filing their tax return for the year in which the sale occurred, they can deposit the gains in the Capital Gains Account Scheme to be eligible for the deduction.