Capital gains tax on sale of land
Capital Gains Tax on Sale of Land: Everything You Need to Know
What is Capital Gain Tax?
Capital gain tax is the tax you pay on the profit you make when you sell something valuable, like land, jewellery, machinery, trademarks, etc. These are referred to as ‘capital assets’. The tax is charged in the year that you sell the asset.
Types of Capital Gain on Land
When you sell land in India, the profit is referred to as capital gain. There are two types:
- Short-term capital gain – If you sell the land within 24 months of buying it, the gain is short-term and taxed as per your income slab.
- Long-term capital gain – If you sell the land after 24 months, it is considered a long-term capital gain. This is usually taxed at 20% with indexation benefits. In some cases (from FY 24-25), it may be taxed at 12.5% depending on when you sold and if indexation is used.
The length of time you hold the land decides how much tax you’ll pay.
Capital Gains Tax Rates
In the table below, we have listed the capital gains tax rates applicable in India in a simple and easy-to-understand manner:
| Type of Asset | Holding Period | Tax Rate |
| Equity Shares and Equity-Oriented Mutual Funds | Long term (held for more than 36 months) | 12.5% on gains above Rs. 1.25 lakh |
| Equity Shares and Equity-Oriented Mutual Funds | Short term (held up to 36 months) | 15% |
| Other Financial Assets like bonds and debentures | Long term (held for more than 36 months) | 12.5% |
| Other Financial Assets like bonds and debentures | Short term (held up to 36 months) | 30% |
| Real Estate | Long term (held for more than 24 months, sold before 23 July 2024) | 20% with indexation benefit |
| Real Estate | Long term (held for more than 24 months, sold after 23 July 2024) | 12.5% without indexation benefit |
| Real Estate | Short term (held up to 24 months) | 30% |
How to Calculate Capital Gain on Sale of Land
Individuals and Hindu Undivided Families (HUFs) have two options for calculating long-term capital gains (LTCG) tax on property sale: pay a 12.5% tax without indexation advantage or pay a 20% tax with indexation benefits.
Example
Short-term Capital Gain Tax Calculation on Land
If you sell land that you have owned for less than 24 months, the profit you make is called short-term capital gain.
To calculate STCG:
STCG = Selling Price – (Purchase Price + Expenses on Sale + Cost of Improvements)
|
Particulars |
Amount (₹) |
|
Sale Price |
1,80,000 |
|
Less: Transfer Charges |
5,000 |
|
Net Sale Value |
1,75,000 |
|
Less: Purchase Cost (Acquisition) |
1,50,000 |
|
Less: Cost of Improvements |
0 |
|
Short-Term Capital Gain |
25,000 |
Long-term Capital Gain Tax on Land
If you sell a Land after holding it for more than 2 years (24 months), the profit you make is called long-term capital gain.
To calculate it, use this formula:
Long-term Capital Gain = Sale Price – (Indexed Cost of Purchase + Indexed Cost of Improvements + Selling Expenses)
Particulars | Amount (₹) |
Sale Value (as per Sec. 50C) | 5,00,000 |
Less: Expenses on Sale (Brokerage, etc.) | 10,000 |
Net Sale Consideration | 4,90,000 |
Less: Indexed Cost of Purchase (FY 2014-15 – Year of Purchase) | ₹2,50,000 × 348 ÷ 240) = 3,62,500 Click here to know more on Indexation |
Less: Cost of Improvement (if any) | 0 |
Long-Term Capital Gain (LTCG) | 1,27,500 |
Exemptions Available on Capital Gain Under the Income Tax Act
Tax Exemption under Section 54
If you sell a residential property and buy another residential house, you can claim an exemption under this section.
But make sure:
- The property sold was held for more than 2 years.
- You buy a new house within 1 year before or 2 years after the sale (or construct one within 3 years).
- The new property should be in India.
Tax Exemption under Section 54F
This one is for when you sell any capital asset (like land or shares) and use the money to buy a residential house.
Things to note:
- You must not own more than one house at the time of sale.
- You must invest the entire sale amount to get full exemption.
If you invest only part of it, then the exemption is calculated like this:
Exempted Amount = (Capital Gains × Cost of New House) ÷ Sale Amount
Tax Exemption under Section 54EC
Instead of buying a house, you can also save tax by investing in specified bonds like NHAI or REC bonds.
Here’s what to keep in mind:
- You should invest within 6 months from the date of sale.
- The maximum you can invest under this is ₹50 lakhs.
- If you don’t invest in time, deposit the money under the Capital Gains Account Scheme in a PSU bank. However, you must invest in the specific bonds within two years; otherwise, the exemption will be cancelled and taxed as a short-term gain.
Tax Exemption under Section 54B
This section applies only when you sell agricultural land and buy another piece of land for agricultural use.
Conditions:
- The land sold should have been used for agriculture by you or your parents for at least 2 years before sale.
- New land should be bought within 2 years.
- The exemption won’t apply if the land is in a rural area as defined under the Income Tax Act.
If there’s a delay in buying the new land, you can keep the amount in a Capital Gains Account till you’re ready, but again, the investment must happen within 2 years, or else it’ll be taxed later.
Conclusion
Capital Gains Tax in India is an important part of tax planning for both individuals and businesses. To stay compliant and avoid unnecessary tax, it is important to understand the types of capital gains, the tax rates that apply, and the exemptions available.
With proper investment planning and by using the right tax-saving options, one can reduce the capital gains tax liability and improve overall returns. It is always better to consult a Tax professional for the right advice and to ensure correct reporting as per Indian tax laws.
With that, we finish this post. Please leave any questions or comments in the below-mentioned area, and we will gladly address them.
FAQs
Q: What is capital gain tax in India on property sale?
Ans: When you sell a property and make a profit, that profit is called a capital gain. This gain is taxable under the capital gain tax in India.
Q. What is the tax rate on long-term capital gains (LTCG) from selling property?
Ans: If you sell a property and make a long-term capital gain, the tax you need to pay is 12.5% or 20%.
Q. If I sell a property, can I save on capital gains tax?
Ans: Yes, you can save on capital gains tax if you use the money from the sale to buy another property.
Q. Do NRIs have to pay tax on profit from selling property in India?
Ans: Yes, NRIs are required to pay tax on the capital gains earned from the sale of property in India. The tax amount depends on how long the property was held short-term or long-term.
