How to Save Capital Gains Tax on Sale of Property?

In India, mitigating capital gains tax on land sales involves utilizing provisions like indexation benefits, investing in specified assets under Section 54/54F, or employing exemptions for agricultural land. Proper documentation and understanding tax-saving avenues are important to optimizing gains and minimizing tax liabilities in land transactions. 

What is Capital Gains Tax?

Capital gains tax is applicable on the sale of property. The tax is levied on the profit earned from the sale of a capital asset, which includes property such as land, buildings, house property, etc. The capital gains tax in India is categorized into two types:

Short-term Capital Gains Tax on Property  (STCG): If the property is held for less than 24 months (previously 36 months for immovable property), any profit earned from its sale is considered short-term capital gains. For individuals, it is taxed at their applicable income tax slab rates.

Long-term Capital Gains Tax on Property (LTCG): If the property is held for more than 24 months (previously 36 months for immovable property), the profit from its sale is treated as long-term capital gains. As of my last update, LTCG on the sale of immovable property like real estate was taxed at a flat rate of 20%, along with indexation benefits.

Also Read: Capital Gain Bonds under Section 54EC of Income Tax Act

Tax Exemptions on Capital Gain on Sale of Property

Based on the type of reinvestment made, capital gains on the sale of property are exempt from taxation under various situations. These exemptions are available under four sections of the Income Tax Act – 54, 54B, 54F, and 54EC.

Section 54

Under this section, exemptions are claimed on capital gains on the sale of property under these situations:

• If the capital gains have been reinvested in only two housing properties. Earlier, exemptions could be claimed only on one property.
• The total capital gains should not exceed Rs. 2 crore.
• The investment must be made either within one year before the date of transfer or within two years after the date of transfer.
• If the money is invested in construction, the construction must be completed within three years from the date of transfer. 
• If the newly bought property is sold in under three years of purchase, the tax exemption will be revoked, and capital gains tax on the sale of a property will be applicable on the sale.
• It is essential to hold ownership of the property for a minimum of three years.

Section 54B

Tax exemptions under this section are applicable only on capital gains earned from the sale of agricultural land that is located outside rural areas and is used for agricultural reasons. Some conditions have to be met to avail of these tax exemptions.

• The rural area must be situated 2 km away from the local limits of either a municipal corporation or a cantonment board. Additionally, the population of the area must be between 10,000 and 1 lakh.
• The capital gain has to be used for the purchase of other agricultural land. This purchase must be done within two years from the date of sale.
• The exemption is provided only on the capital gain, and not on the entire sale consideration. This exemption amount is calculated based on the reinvestment in the new agricultural land.
• If the newly bought agricultural land is sold in under three years of purchase, the tax exemption gets revoked, and capital gains tax on the sale of property will be applicable on the sale.

Also Read: Comparison of Long-Term and Short-Term Strategies

Section 54F

Tax exemptions can be made on capital gains generated from the selling of long-term capital assets, excluding housing property. However, here are a few points to be noted-

• The long-term capital assets must not include housing property.
• The entire amount of money received as consideration from the sale of the capital asset has to be reinvested in not more than two housing properties.
• The investment has to be made within one year before the sale or two years after the sale.
• If the money is invested in construction, the construction must be done in less than three years from the date of sale. 
• The exemption will be given on the total capital gain amount only if the entire consideration amount is reinvested. If the whole amount is not reinvested, the exemption will only be done on the amount reinvested. 

Section 54EC

Under Section 54EC of the Income Tax Act, tax exemptions can be availed on capital gains from the sale of property by reinvesting it in bonds by NHAI (National Highway Authority of India) and REC (Rural Electrification Corporation)

• A maximum amount of Rs. 50 lakhs can be invested to claim exemptions 
• The investment in these bonds can be redeemed only after 5 years. 
• The investment in the bonds has to be done within six months of the date of sale or before filing taxes. 
• If it is not possible to invest in the bond before filing the tax, the money can be deposited in any public sector bank or a bank listed under the Capital Gains Account Scheme (CGAS). 
• If the money deposited is converted into an investment in under two years from the date of sale, the exemption is valid. But if the deposit remains as is even after two years, it is considered to be short-term capital gains. 

After the sale of land or any property, capital gains tax has to be paid. However, by reinvesting the amount within a specific period, payment of this tax can be saved. Some exemptions to this tax are provided under the Income Tax Act, of 1961.