Understanding Capital Gains
Capital gain is the increase in the value of an asset over time. The owner realizes this gain when the property is sold. The difference between a property’s selling and purchasing prices constitutes the capital gain.
Any profit derived from a capital asset will be considered Capital Gains for income tax purposes. Land is categorized as a Capital Asset, and its sale can result in significant capital gains. However, agricultural land in rural India is not classified as a Capital Asset, hence no capital gains tax applies to its sale.
Short-Term vs. Long-Term Capital Gains
The tax implications for capital gains vary based on whether the gains are short-term or long-term. Gains are considered short-term if the land was held for up to 2 years before selling. Conversely, gains are viewed as long-term if the land was held for more than 24 months.
Calculating 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)
Long-Term Capital Gains (LTCG)
The calculation for long-term capital gains involves deducting the Indexed Cost of Acquisition or indexed cost of improvements from the sale price. Indexation adjusts the purchase price to account for inflation using the Cost Inflation Index (CII), thereby increasing your cost base and reducing 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)
Tax Rates
- STCG is taxable income and taxable at applicable slab rates.
- LTCG is taxed at a rate of 20%, with an indexation benefit.
Saving Capital Gain Tax on Residential Property Sale
Section 54F
If you use the proceeds from the sale of land to buy a house, you may claim an exemption from capital gains tax if you meet the following conditions:
- The exemption is only for individuals or HUFs; not applicable to corporations, LLPs, or firms.
- The new house must be in India.
- Purchase the house within one year of the land sale date or two years thereafter.
- Build one house within three years of the land sale date.
- Do not sell the house within three years of purchase or construction.
- Own only one residential house excluding the new one on the transfer date.
By Investing in the Capital Gains Account Scheme
Finding suitable property and completing necessary paperwork can be time-consuming. The Income Tax Department acknowledges these constraints. By depositing the capital gains in the Capital Gains Account Scheme (CGAS), you can claim an exemption from capital gains.
54EC Bonds
If you do not intend to purchase another property, you can still save taxes by investing in the following bonds:
- Rural Electrification Corporation Limited bonds (REC bonds)
- Bonds issued by the National Highway Authority of India (NHAI)
- Power Finance Corporation Limited bonds (PFC bonds)
- Indian Railway Finance Corporation Limited bonds (IRFC)
These bonds 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 to claim the exemption. The Budget for 2014 allows a maximum investment of Rs 50 lakhs in these bonds in a financial year.