Tag Archives: Capital gain tax

Land Sale Capital Gains Tax

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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. 

Capital Gain Tax on Land Sale

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What is Capital Gain?

A capital gain is simply the profit or loss from the sale of a capital asset. You will have long-term capital and short-term capital gain if you sell a Short term capital asset. If the sale results in a loss, you will incur a capital loss. The Capital Gain will be taxable in the year when the capital assets become available. 

Capital Gains Tax on the Sale of Real Estate 

Capital gains can be of two types, depending on how long the capital asset remains in use. 

  • Long-Term Capital Gain (LTGG) or Long-Term Capital Loss (LTCL): If a taxpayer sells an immovable property or land held for more than 24 months, the gain or loss on such sales is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL). 
  • Short-Term Capital Gain (STCG): A Short-Term Capital GAIN (STCG) or Short-Term Capital Loss (STCL) is a gain or loss on the sale of immovable property or land held for up to 24 months by the taxpayer. 

According to the Income Tax Act, movable property or land is a capital asset. When a taxpayer sells an immovable property or land, the income or loss is reported as Capital Gains in the Income Tax Return and taxed at the applicable rate. The nature of the capital gain determines the capital gain tax on the sale of property or land, whether long-term or short-term. While the STCG on the sale of immovable property is taxable at slab rates, the LTCG is taxable at 20% with indexation benefit under Section 112 of the Income Tax Act. 

Income Tax on the Sale of Land Sale 

The tax treatment of immovable property, such as land, buildings, or houses, is similar to that of other capital assets. 

Calculation of Long-Term Gain Tax on Property Sales in India 

LTCG on the sale of immovable property in India is taxable at 20% with an indexation benefit, according to Section 112 of the Income Tax Act. To take advantage of the indexation benefit, the taxpayer can compute the long-term capital gain by calculating the indexed cost of the acquisition using the Cost Inflation Index (CII). The taxpayer’s cost of improvement is the expense incurred for adding or improving the capital asset. Using CII, the taxpayer can also calculate the Indexed Cost of Improvement. 

Particulars Amount 
Sales Consideration 
LessTransfer Expenses 
LessIndexed Cost of Acquisition 
LessIndexed Cost of Improvement 
LessExemption u/s 54 to 54 GB
Long-Term Capital Gain
  • Sale Consideration = In the case of immovable property, the sale consideration should be the offer value of the capital asset or the value adopted by the stamp duty valuation authority to Section 50C of the Income Tax Act.  
  • Transfer expenses are expenses incurred solely to sell a capital asset. 
  • Cost of Acquisition = (CII of the year of Sale/ CII of the year of Purchase) = Indexed Cost of Acquisition  
  • Cost of Improvement = (CII of the year of Sale/ CII of the year of Improvement) = Indexed Cost of Improvement
  • Capital Gain Exemption = Taxpayers who meet the specified conditions can claim a capital exemption under Sections 54 to 54GB. 

Calculation of Short-Term Capital Gain tax on the sale of Property in India

The short-term capital gain on the sale of real estate is taxable at the slab rates. There is no indexation benefit in the case of a Short capital gain. 

Capital gain exemptions, also through Sections 54 to 54 GB, aren’t enough. As a result, the Capital Gain calculation of the acquisition, improvement, and transfer costs 

How to Save Capital Gain Tax on the Sale of Residential Property

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Capital gain is the increase in the value of an asset over time. The owner realizes this capital gain when the property sells. The difference between a property’s selling and purchasing prices is capital gain. 

Any profit derived from a capital asset will qualify as Capital Gains for income tax purposes and be subject to capital gains tax. The land is known as a Capital Asset, and as its value rises, the owner may realize significant capital gains upon sale. Nonetheless, it is worth noting that agricultural land in rural India does not meet the definition of a Capital Asset. As a result, no capital gains tax applies upon its sale. Let us look at how profits from the sale of land will be taxed and how we can save money on taxes. 

Short-term or long-term capital gains

The tax implications vary depending on whether the gains are short-term or long-term. Capital gains are regarded as short-term if you owned the land for up to 2 years (24 months) before selling. It will, however, be considered a long-term capital gain if held for more than 24 months. 

How to Calculate Capital Gains 

Short-term capital gains (STCG)

The Particulars Amount 
Total Selling Price (xxx)
Less:(xxx)
Acquisition Cost (xxx)
Direct Sale Expense (xxx)
Exception Sections- 54B, 54D, 54G, 54GA(xxx)
STCG (Short-term capital gains)(xxx)

The only difference for Long capital assets is that you can deduct the Indexed Cost of Acquisition/ or indexed cost of Improvements from the sale price. Indexation is a way of adjusting the purchase price to account for the impact of inflation using the Cost Inflation Index (CII). This adjustment increases your cost base (and reduces your gains).

Particulars Amount 
Total Sales Price (xxx)
Less:(xxx)
Acquisition Cost Index (xxx)
Direct Sales Expense (xxx)
Exemption Section: 54B, 54D, 54EC, 54F, 54G, 54GA(xxx)
Long-term Capital Gain (xxx)

What are the Tax Rates?

  • STCG is taxable income and taxable at the applicable slab rates. See the latest income tax slab rates. 
  • LTCG gets taxed at a rate of 20%, with an indexation benefit. 

How to save Capital Gain Tax on the sale of residential property

Section 54F (applying if the asset is a long-term capital asset)

If you use the proceeds from the sale of land to buy a house, you may be able to claim an 

exemption from capital gains tax if you meet all of the following conditions:

  • The exemption only applies to individuals or HUFs; it’s not open to corporations, LLPs, or firms. 
  • The new house you buy or build must be in India. 
  • Purchase the house within one year of the land sale date or two years after the sale date. 
  • Build one house within three years of the date of the land sale. 
  • Do not sell the house within three years of purchasing or building it. 
  • You should only own one residential house on the transfer date, excluding the new one. 

If you meet these requirements and invest the sale proceeds in the new home, you will not be subject to capital gain taxes. An exemption is proportional to the amount invested, which is the cost of the new house multiplied by the capital gains/ net consideration. 

By Investing in Capital Gains Account Scheme 

Finding a suitable seller, arranging the necessary funds, and completing the vital paperwork for a new property can be a stressful and time-consuming jobs. Fortunately, the Income Tax Department is aware of these constraints. 

If you need to invest your capital gains till you file your income return (usually on the 31st of July), you may deposit them in the Capital Gains Account Scheme (CGAS). And claim this as an exemption from capital gains in your return; you will not have to pay tax on it. 

54EC (applicable if it is a long-term capital asset)-Purchasing Capital Gains Bonds 

What if you never intend to purchase another property? It is pointless to invest the money in a Capital Gains Account Scheme. In this case, you can still save taxes on your capital gains by putting them in the following bonds:  

  • Rural Electrification Corporation Limited bonds, also known as REC bonds, 
  • Bonds issued by the National Highway Authority of India, or NHAI. 
  • Power Finance Corporation Limited bonds, also known as PFC bonds, 
  • Indian Railway Finance Corporation Limited, or IRFC, issued bonds. 

These are redeemable after five years and cannot be sold within three years of the house’s sale date. 

You have six months to invest in these bonds; however, to claim this exemption, you must invest before the return filing date. The Budget for 2014 has specified that you are allowed to invest a maximum of Rs 50 lakhs in these bonds in a financial year.