Capital Gain on Sale of Land – Tax Exemption Rules

Are you planning to sell a plot of land? Well before you execute your deal, you should know the tax implications on capital gain on sale of land. If your land comes under the definition of rural agricultural land, then it is not considered as a capital asset and hence any income from its sale is not taxable. However, income from any other land such as a residential plot, commercial plot, urban agricultural land etc. is taxable. There are provisions available in Income Tax Act under which you can get tax exemption on capital gain on sale of land.

For definition of urban & rural agricultural land and their tax implications, read Capital Gain on Sale of Agricultural Land.

Short Term or Long Term Capital Asset?

If you have held the capital asset (land in this case) for more than 3 years from the date of its acquisition, it is termed as a long term capital asset while any capital asset that is sold within 3 years is known as a short term capital asset.

Computation of Capital Gain

Short Term Capital Gain and Long Term Capital Gain are calculated by following formulae,

Short Term Capital Gain = Sale Consideration – Cost of Acquisition – Cost of Improvement – Cost of Transfer

Long Term Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Cost of Transfer + Exemptions)

As you may notice in the above formula that for the calculation of long term capital gain you are allowed to deduct indexed cost of acquisition and improvement. Indexed costs are calculated by applying Cost of Inflation. This way, the costs are adjusted for inflation and your long term capital gains are reduced.

Also read – Capital Gain on Sale of Property

Tax Rates

Short term capital gains are included in your taxable income and you will have to pay tax as per the applicable tax slab for your income.

Long term capital gains are taxed at a flat rate of 20%.


Tax Exemptions on Capital Gain on Sale of Land

You can avail tax exemption on capital gain on sale of land (residential & urban agricultural land) under section 54EC and Section 54F of IT Act.

Exemption under section 54EC

Under section 54EC, you can claim tax exemption by investing the capital gain amount from sale of land in specified bonds of National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC). Maximum investment allowed in specified bonds is Rs. 50 lakhs. The period of maturity for these bonds is 3 years and they must not be sold before 3 years to avail tax exemption.

Check out more details here – Section 54EC of Income Tax Act.

Exemption under section 54F

In order to avail exemption on capital gain on sale of land under section 54F, you have to invest entire net consideration from sale of land in

  1. Purchase of one residential house property within 1 year before or 2 years after the date of transfer of original land or
  2. Construction of one residential house property (new asset) within 3 years after the date of transfer of land

If you invest entire sale proceeds in the residential house property, you will get tax exemption on the entire capital gain amount.

However, if you invest only a part of the sale proceeds, you will get tax exemption on the proportionate capital gain amount, which can be calculated by the formula,

Exemption Amount = Capital Gain X Amount Invested/ Net Sale Consideration

Check out other conditions that you need to satisfy under Section 54F of Income Tax Act.

Capital Gain Tax Exemption on sale of Agricultural Land

Other than exemptions available under section 54EC and 54F, for agricultural land, you can also claim exemptions under Section 10(37) and Section 54B. For details, check our article on Capital Gains on sale of Agricultural Land.

Capital Gain Account Scheme

You can also utilize Capital Gain Account Scheme (CGAS) for claiming tax exemption. If you are not able to invest your capital gain amount immediately, you can deposit your amount in a special Capital Gain Account till the time you are able to finalize the house property. You can open such an account at any of the authorized PSU banks that are providing Capital Gain Account Scheme. Amount deposited in a CGAS account is not taxable upto 3 years, depending on the type of investment you plan to make.

You can find out more information on this scheme here – Capital Gain Account Scheme 1988.

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