Capital Gains Tax Exemption Options on Sale of Property

Capital asset typically refers to anything that you own for personal or investment purposes. It includes all kinds of property; movable or immovable, tangible or intangible, fixed or circulating.

Examples include a house, land, Flat, stocks, bonds or mutual funds held as investments etc.,

When you sell a capital asset, the difference between the purchase price of the asset and the amount you sell it for is a capital gain or a capital loss. Capital gains and losses are classified as long-term or short-term.

If Land or house property is held for 24 months or less (w.e.f. FY 2017-18) then that Asset is treated as Short Term Capital Asset. You as an investor will make either Short Term Capital Gain (STCG) or Short-Term Capital Loss (STCL) on that investment.

If Land or house property is held for more than 24 months (w.e.f FY 2017-18 / AY 2018-19) then that Asset is treated as Long Term Capital Asset. You will make either Long Term Capital Gain (LTCG) or Long-Term Capital Loss (LTCL) on that investment. You may have to pay Capital Gains Tax on STCG / LTCG.

In this post let us understand – How to calculate Short Term capital gains on sale of land or property? How to calculate Long Term Capital Gains on sale of land or house? What are the applicable capital gain tax rates on sale of land / house property? How to avail Capital Gains Tax Exemption on Sale of Land or House in FY 2023-24 (AY 2024-25)?

How to calculate Capital Gains on sale of House or Plot?

Short Term Capital Gains Calculation is calculated as below;

STCG = Total Sale Price – Cost of acquisition – expenses directly related to sale – cost of improvements

Sale of Property & Long Term Capital Gains Calculation;

The LTCG calculation is similar to STCG. The only differences are, you are allowed to deduct Indexed Cost of Acquisition/Indexed Cost of Improvements from the sale price and also claim certain Capital Gains Tax Exemptions.

With effective from Financial Year 2017-18, the base year for calculation of Indexation is 2001.

(Indexation is done by applying CII – cost inflation index. This increases your cost base ie purchase price and lowers your gains. Your purchase price is adjusted for the impact of inflation.

How do you calculate the indexed cost of purchase? The indexed cost is calculated with the help of a table of cost inflation index.

Divide the cost at which you purchased the Property by the index as on the date of the purchase. Multiply this by the index as on the date of sale.

For Example : If purchase year is 2011 and year of sale is in Financial Year 2023-24. Then indexed cost of purchase would be –

Indexed cost of purchase =  (Purchase price / 184) * 348.)

Related Article: What is Cost Inflation Index?

Below is the Cost Inflation Index Table from 2001-02 to FY 2023-24 for your reference. Cost Inflation Index (CII) for FY 2023-24/ AY 2024-25 Notified by CBDT at 348.

What are the applicable Capital Gains Tax Rates on Sale of Property AY 2024-25?

• Short Term Capital Gains are included in your taxable income and taxed at applicable income tax slab rates.
• Long Term Capital Gains on sale of house or plot are taxed at 20%, with indexation benefit as explained above.

How do I avail Capital Gains Tax Exemption on sale of Property for FY 2023-24?

Please note that Capital gains tax on Short term gains is unavoidable, and no tax exemptions are available to minimize your tax liability. However, you can claim deductions to lower the tax liability on long-term gains.

How to save Capital Gains Tax by claiming Exemption u/s Section 54EC? 

Kindly note that Section 54EC option is applicable to LTCG on sale of both land / house property / commercial property.

• Capital gains from sale of any long-term asset can be claimed as tax-exempt under Section 54EC of the Income-Tax Act by investing in notified bonds within six months of the transfer of Asset.
• These bonds are issued by the Rural Electrification Corporation and the National Highways Authority of India.
• The exemption is equal to the investment or the capital gain, whichever is lower. If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.
• The Bonds issued u/s 54EC for saving of LTCG on sale of property have a lock-in period of 5 years instead of 3 years w.e.f FY 2018-19.
• You are allowed a period of 6 months to invest in these bonds, but before the Income Tax Return filing date (to claim this exemption).
• You can invest a maximum of Rs 50 lakh during a financial year in these Capital Gains Tax Saving bonds.

How to save Capital Gains Tax  by claiming Exemption u/s Section 54?

The primary objective of the sections 54 and section 54F of the Act was to mitigate the acute shortage of housing, and to give impetus to house building activity. However, it has been observed that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses. It is defeating the very purpose of these sections.

Hence, with effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54. In case the cost of the new property (capital asset) exceeds Rs. 10 crore, the excess amount shall be ignored for computing the exemption under Section 54. Up to FY 2022-23, there was no tax exemption ceiling limit u/s 54.

Kindly note that Section 54 option is applicable to LTCG on sale of House property only. You can use the Long Term Capital Gain proceeds on sale of a residential house to buy another house property (residential property) to save Capital Gains tax. Below conditions need to be satisfied though;

• The new house has to be bought one year before (under-construction property) the transfer of the first house or within two years after the sale. (For an Under-construction property or flat, the construction has to be completed within three years of the transfer of the first property.)
• The deduction allowed is equal to the actual investment (up to Rs 10 crore) or the capital gain, whichever is lower.
• If you plan to use the gain to build a house, it has to be done within three years of the sale of the property. Do note that ‘cost of land’ can be included in the construction cost.
• Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. With effect from Assessment Year 2021-22, a taxpayer has an option to make investment in two residential house properties in India to claim section 54 exemption. This option can be exercised by the taxpayer only once in his lifetime provided the amount of long-term capital gain does not exceed Rs. 2 crores.

How to save Capital Gains Tax u/s 54F for AY 2024-25? (Conditions applicable to LTCG on sale of Land or Commercial Property)

With effect from Assessment Year 2024-25, the Finance Act 2023 has restricted the maximum exemption to be allowed under Section 54F as well. In case the cost of the new property (capital asset) exceeds Rs. 10 crores, the excess amount shall be ignored for computing the exemption under Section 54. Up to FY 2022-23, there was no tax exemption ceiling limit u/s 54F.

• You can use the sale proceeds (received by selling a plot / land) to buy a new house or to build a new residential house.
• If you use a part of the money, the deduction will be proportion of the invested amount to the sale price.
• The time-frame for investment is the same as that for capital gains from residential property.
• You should not own more than one residential house prior to this investment.
• The deducted capital gain (from sale of land) becomes taxable if you buy another house (other than the new one) within two years of the transfer of the original asset or construct a new one within three years.
• If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
• This new house purchased or constructed must be situated in India.
• The proceeds should not be invested in a commercial property or in another vacant plot.

How to Save Long Term Capital Gains Tax without buying another House Property?

If you are unable to invest the sale proceeds in any of the above options before the date of income tax returns filing, you can deposit the CAPITAL GAINS (not entire sale proceeds) amount in a public sector bank or other banks as per the Capital Gains Account Scheme- CGAS, 1988.

With effective from 1st April , 2023 (i.e. A.Y. 2024-25), Capital gain of upto to Rs. 10 Crore can be deposited in CGAS.

• CGAS is only a stop-gap arrangement, as the funds have to be used to buy or build a house within the period specified.
• The deposited money can be used only to buy or construct a residential house within the prescribed time frame.
• If you withdraw funds from this account, they have to be used within 60 days.
• If you do not utilize the amount within three years of the sale of the first property, such un-utilized amount will be treated as LTCG this will lead to taxation of the unutilized amount as long-term capital gain after three years of the sale of the first / original property.
• The interest rates paid on these accounts are the same as those on regular savings and term deposits. Kindly note that interest earned on this account is taxable.

How to Save Long Term Capital Gains Tax under New Section 54GB (5)?

Under Section 54GB(5) of the Income Tax Act, 1961, long term capital gains on the sale of residential property will be exempt if the sale proceeds are invested in a eligible startup company. To be competent for the benefits of Section 54GB, an individual or HUF must have held the residential property for at least 3 years before selling it. The maximum investment limit under Section 54GB is Rs. 50 lakhs.

Important points on Capital Gains Tax & Sale of Land / Home

• Agricultural land in a rural area in India it is not considered a Capital Asset, and therefore no capital gains are applicable on its sale.
• While calculating capital gains, expenses related to transfer / sale like advertisement expenses, brokerage expense, Stamp duty, Sale deed registration fees, Legal (lawyer) expenses etc., can be deducted from the Purchase price.
• Sale of a property that is inherited or accepted as a gift will also attract capital gain/loss provisions even though you haven’t spent any money to acquire it. In such a case, capital gains will be computed on the basis of the cost to the previous owner, indexed to the year of purchase.
• If the cost of the new residential property is lower than the total sale amount, then the exemption is allowed proportionately.
• The new property must only be bought on the name of the seller and not on anybody else’s name. Joint ownership can be acceptable but exemption can be limited to the share of ownership.
• You must also remember that you are allowed to purchase or construct only one new asset from the capital gain that accrues. This means that you cannot make multiple property acquisitions and thus seek to reduce your tax outgo. However, if you sell more than one property, you can invest the resulting cumulative capital gain amount in a single new property.
• If you use the capital gain amount to clear loans then tax on LTCG cannot be saved. No exemptions can be claimed.
• Capital Gain Tax cannot be saved if the sale proceeds are invested in a commercial property, agricultural land or plot.
• According to the latest amendments in the Income Tax Act, the residential property which is bought by re-investing the long-term capital gains must be situated in India. If you would like to buy a property outside India, say in the US, you need to pay tax on the capital gain portion of the sale proceeds.

To put in a nut-shell;

• Categorize your capital gains i.e., Short term or Long term.
• Calculate Short Term Capital Gains (STCG) / Long Term Capital Gains (LTCG).
• If you have STCG, taxes are payable as per your income tax slab rate.
• If you have LTCG, to save capital gains tax ;
  • You may invest the gains in another Residential property (or)
  • Buy Notified Bonds (or)
  • Temporarily invest in Capital Gains Account Schemes.
• Else, you have to pay 20% on your Long Term Capital Gains.

Calculation of Capital Gains Tax on sale of property can sometimes be a tricky one. It is advisable to exercise caution when claiming Capital Gains Tax Exemptions. When in doubt, kindly consult a tax expert or a Chartered Accountant.

Suggested Reads :

1. Agricultural Income & Sale of Agricultural land : Tax Treatment, Computation & Implications
2. Sale of Inherited (or) Gifted Property & Tax implications on Capital Gains
3. Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
4. 10 Important Things to do after buying a Real Estate Property
5. Long Term Capital Gain Exemptions on Sale of Property & Recent Court Judgments

(Post first published on : 24-Jul-2023)