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“Understand the income tax provisions on the taxability of capital gains from the sale of land. Explore the types of capital gains, calculation methods, tax rates, and deductions available under sections 54F and 54EC. Learn how to optimize tax liabilities and make informed decisions when dealing with the sale of land.”

Capital gain refers to the profit earned from sale of a capital asset. As land is a capital asset, any profit from sale of a land attracts capital gain tax, subject to following conditions. (i) Rural agricultural land is not a capital asset. So capital gain tax does not arise on sale of such land. (ii) Urban agricultural lands are considered as capital assets and capital gain tax is chargeable on sale of any such land. (iii) A land is considered as an agricultural land for this purpose, if it is used for a period of at-least 2 years for agricultural purpose before its sale.

Types of Capital gain:

(i) Short-term capital gain: When land is sold before holding for 24 months.

(ii) Long-term capital gain: When land is sold after holding it for 24 months or more (36 months in case of movable properties).

Calculation of capital gain:

Capital gain= Sale proceeds-cost of acquisition-cost of improvement-cost of sale.

[In case of LTCG, Cost of acquisition & cost of improvement are indexed by using the CII. In case of ancestral property, cost of acquisition incurred by the donor is considered for indexation.]

Capital gain Tax rate:

Short-term capital gain (STCG) is taxable at the “Normal Slab Rate” applicable to the tax payer, whereas Long-Term Capital Gain (LTCG) is taxable at 20% of the capital gain.

Deduction allowed from capital on sale of land:

(I) Deduction under section 54F:

An assessee is fully exempted from capital gain tax, if he invests the whole sale proceeds in buying or constructing a new house property, subject to satisfaction of the following conditions:

(a) Buy the new house within 1 year before or 2 years after the sale of land.  Construct the new house within 3 years of sale of the land;

(b) Do not sale the new house within 3 years of its purchase/ construction;

(c) This new house must be situated in India;

(d) The assessee should not own more than 1 house (other than the new one) on the date of sale of land;

(e) Do not purchase within a period of 2 years of land sale or construct within a period of 3 years of land sale, another new house (other than the one on which deduction is claimed);

(f) If whole of the sale proceeds is not invested in purchase/construction of new house, capital gain tax is exempted in proportion to the amount of investment;

(g)  If the assessee is not able to invest the whole amount of sale proceeds until the date of filing the income tax return for the year of sale (usually 31 July), he can still claim the deduction by depositing the unspent amount in a PSU bank or any other bank as per the “capital gain account scheme 1988”. However, he needs to invest it within the period stipulated i.e., 2 years in case of purchase and 3 years in case of construction.

(II) Deduction under section 54 EC:

If the assessee does not want to invest in a new house property, still he is allowed to avail the deduction, if he invests the whole sale proceeds in specified bonds within a period of 6 months or before due date of filing IT return, whichever is earlier. Bonds specified for this purpose are the bonds issued by National High Way Authority of India and Rural Electrification Corporation. These bonds are redeemable after 5 years. These bonds should not be sold before 3 years of sale of land. A maximum amount of 50 lakhs can be invested in such bonds.

Conclusion: By adopting the provisions under section 54F and Section 54EC of the Income Tax Act 1961, taxpayers have a good scope to reduce their tax liability arising by sale of land. So, a clear understanding of the provisions under these two sections of Income Tax Act can be helpful to the taxpayer to a great extent.


Author Bio

Mr. Aditya is a versatile and seasoned professional with cross functional expertise in the fields of Income Tax, GST, Accounts, Finance & Audit. Due to strong interest in practice, he left the job of Vice-President (Accounts & Taxation) of a finance company and practicing as a Tax & Corp View Full Profile

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July 2024