Your Questions Answered: How is capital gains tax calculated when I sell my plot of land? | Mint

Q. I am selling a plot of land. How will the capital gains be taxed? How can I save capital gains tax?

The profit on sale of a plot of land is treated as long term capital gains if the plot of land has been held for more than 24 months, else the gains are treated as short term capital gains. The short term capital gains are added to your regular income and taxed at your slab rates. The long term capital gains are taxed at 12.50%. The resident individual who had acquired the plot of land prior to 23rd July 2024 has the option to pay tax either on unindexed long term capital gains at 12.50% or at 20% on indexed long term capital gains.

You can save tax on capital gains made on sale of the plot only if the capital gains are long term in nature. No exemption is available in respect of short term capital gains.

Section 54F: Reinvest in a residential house

In case you are selling a plot which you have held for 24 months or more, you have two options to save tax on long term capital gains. Under the first option available under Section 54F you can claim exemption from long term capital gains if you purchase or construct a residential house within a prescribed time period. The investment in residential houses has to be made within two years. Even if you have already bought a residential house within one year before sale of the plot of land you can still claim the exemption.

If you go for self-construction or book an under construction flat the construction has to get completed within three years to claim the exemption. For claiming the exemption, you are required to invest the full net sale consideration in one residential house. In case full sale consideration is not invested the amount of exemption available will come down proportionately. This exemption can only be claimed if you do not own more than one residential house on the date of sale of the plot of land.

Please note that in case you are not able to utilise whole of the money for the above purpose by the due date of filing your return of income, you have to deposit the unutilized money in a Capital Gains Account under Capital Gains Account Scheme to be opened with a scheduled bank. You can use this money for the purchase or construction of the house within the required time period.

Section 54EC: Invest in capital gains bonds

The other option is available to you is under Section 54EC under which you have to invest in capital gains bonds of specified financial institutions like REC (Rural Electrification Corporation), NHAI (National Highway Authority of India), PFC (Power Finance Corporation), RFC (Railway Finance Corporation). Please note for availing exemption under Section 54EC you are required to invest only the plain long term capital gains and not the whole of the sale consideration in the bonds.

Please note that since indexation benefit is not available now for claiming exemption, you will have to invest the plain long term capital gains. You can invest maximum up to Rs. 50 lakhs in these bonds during one financial year. There is also a restriction of Rs. 50 lakhs up to which you can claim exemption under Section 54EC in respect of one financial year.

This investment has to be made within a period of six months from the date of the sale. The period of six months can even go beyond your due date of filing your return and you are not required to put the unutilized money in a capital gains deposit account. These bonds presently carry a coupon rate of 5.25% payable annually. This interest is taxable.

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Balwant Jain is a tax and investment expert and can be reached at [email protected] and @jainbalwant on his X handle.

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