Capital gain refers to any profit realized from selling a capital asset. Capital assets can include houses, land, stocks, mutual funds, jewelry, and trademarks. Since this gain is classified as income, it is subject to tax in the fiscal year when the capital asset is sold.
Taxpayers need to remit taxes on their earnings each fiscal year, and this applies to capital gains as well.
When it comes to land, since it constitutes a capital asset, any profits from its sale also incur capital gains tax. Below is a comprehensive overview of capital gains tax and the method of calculating it.
Capital Gains Tax for Land Sales
Selling a house or land necessitates paying capital gains tax. There are two categories of capital gains tax: short-term capital gains (STCG) for properties held for under 36 months, and long-term capital gains (LTCG) for properties held beyond that timeframe.
For STCG, the profits derived from selling land become part of the owner’s taxable income, with tax obligations based on the income tax bracket applicable during that fiscal year. The current tax rate for LTCG stands at 20%.
Calculating Capital Gain on Land Sale
Here's a breakdown of how to determine capital gains when selling a house:
Capital Gain Tax (STCG)
When selling land within 36 months of purchase, deduct the acquisition cost, any improvement expenses, and sale-related costs from the final sale price. This calculation yields the STCG.
For example:
In 2015, Mr. Ansari purchased a parcel of land for Rs. ten lakh. In 2016, he sold it for Rs. 15 lakh. Consequently, Mr. Ansari’s total income increases by Rs. 5 lakh, where tax liability will correspond to his tax bracket. It becomes clear that calculating STCG is straightforward, as this profit is considered part of total income.
LTCG – Capital Gains Tax
With LTCG, owners can deduct indexed acquisition and improvement costs from the property sale price. This tactic reduces taxable capital gains, as acquisition or improvement costs increase over time.
To calculate LTCG accurately, the cost inflation index (CII) plays a vital role. Each year, this index is issued by the government and is essential for assessing the indexed costs of acquisition and improvements.
Cost Inflation Index Formula = Index for the fiscal year of transfer / Index for the fiscal year of acquisition.
Are Deductions Available to Reduce Capital Gains Tax?
Yes, the Income Tax Act provides several options for landowners to mitigate their capital gains tax burden. Here are some prominent ones:
Section 54F of Income Tax
This section permits a 100% deduction on capital gains tax if the entire gain from land sale is utilized for purchasing or constructing a new house. However, there are specific conditions and limitations tied to this provision.
Income Tax Section 54EC
Under Section 54EC, investors can claim deductions on LTCG from land sales when they invest in capital gains bonds, such as those offered by the Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI). Additionally, if taxpayers do not utilize these IT Act sections, they can make capital gains deposits in a bank, which are tax-deductible under the Capital Gains Account Scheme.
Tax Advice for Home Sellers
- Exemptions for acquiring new residential properties are usually proportional to the total sale price. Under Section 54EC, reinvesting the remaining amount within six months is permissible.
- Exemptions will also apply if the builder fails to deliver the new residential property within three years post-purchase.
- Capital gains calculations can leverage stamp duty and property valuation conducted by the registration authority.
- If sellers cannot reinvest their gains in bonds or properties before filing taxes for the year of sale, depositing their gains in the Capital Gains Account Scheme allows them to qualify for the applicable deductions.