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.