I own a piece of land which I want to sell. How can I save on capital gains tax?

I own a piece of land which I want to sell. Is there a way to save capital gains tax?

Reply by: Balwant Jain, a tax and investment expert

You can save tax on capital gains made on sale of the plot only if you have held the plot for 24 months or more. Such capital gains are treated as long-term capital gains. However, in case the plot, which you want to sell, was held for less than 24 months, any profit on sale of it will be treated as short-term capital gains. Such capital gains shall be included in your income and will be taxed at the slab rate applicable to you.

In case you are selling a plot which you have held for more than 24 months or more, you have two option to save tax on long term capital gains. The first option is available under Section 54F where you will get exemption from long term capital gains for purchase or construction of a residential house. The investment in residential house has to be made within two years after or one year before from the date of sale of the plot. You can also claim the exemption if you construct a house within three year and invest the net consideration.

Please note that in case you are not able to invest the whole of the money for the above purpose before due date of filing of your return of income, you need to put the unutilized money in capital gains deposit account to be opened with a scheduled bank. You can use the money so deposited for the purchase or construction of the house. You will get exemption for whole of your capital gains if you invest full sale consideration on sale of such plot for purchase of a residential house otherwise the exemption available shall be in the proportion in which you invest the net consideration for the above purpose.

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 indexed long term capital gains and not the whole of the sale consideration in the bonds. 

There is also restriction of up to Rs. 50 lakh, 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 of your return and you are not required to put the unutilized money in capital gains deposit account. These bonds presently carry a coupon rate of 5.25% payable annually. This interest is taxable.

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)

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