3 Ways to Save Capital Gains Tax on Sale of Land

An investment made on acquiring land is known as capital assets, and when you sell it, the resulting profits constitute capital gains. Depending on the period you hold the land, you can classify the capital gain into two categories:

• Short-Term Capital Gain (STCG) is the profit made from selling your land within 24 months of holding it. The STCG gets added to your taxable income, and you have to pay the income tax as per your tax slab.
• Long-Term Capital Gain (LTCG) is the profit realized from the property sale after at least 24 months of acquiring it. To account for the rising cost and inflation, the Income Tax Department uses indexation and allows you to reduce the indexed cost of acquisition from the sale price. Irrespective of your tax slab, you have to pay income tax @ 20% on the resulting LTCG.

Note: The cost of acquisition for LTCG and STCG involves the cost of purchase as well as improvement, transfer, etc.
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As the price of land continues to grow in every part of the country, people often generate considerable capital gains when they sell it. However, there are some ways in which you can significantly reduce capital gains tax, as mentioned below:

• You do not own more than one residential property before this investment.
• The investment must be in a residential property located in India.
• You do not sell the new property within three years of purchasing it.

1. Invest in Notified Bonds: Under Section 54EC of the Income Tax Act, you can claim tax-exemption on LTCG by investing in bonds issued by the Rural Electrification Corporation and the National Highways Authority of India. These bonds have a lock-in period of 5 years, and you must purchase them within 6 months of transfer of your asset.You can invest a maximum of Rs 50 Lakhs under this scheme. However, if you transfer the bonds or take a loan against these bonds within 3 years, your investment becomes taxable.
2. Buy a House Property: You can use the income from selling your land to buy a house property. This investment is tax-exempt under Section 54F if you meet the following conditions:
3. However, if you buy a new house within 2 years or construct another house within three years of the transfer, the LTCG becomes taxable.
4. Deposit the Capital Gain in the Capital Gains Account Scheme (CGAS): However, if you are not able to find a suitable property or bonds to invest in the current assessment year, you can deposit the capital gains in the CGAS of public banks. While filing ITR, you can claim tax exemption on the capital gains parked in CGAS account. However, you must utilize the deposited amount within 3 years to purchase a residential property, failing which you have to pay tax on it.

Investing in real estate can help in asset creation to give you financial security and stability for the future. However, when you sell land, the tax on capital gains should not come as a bitter surprise. Hopefully, by taking advantage of the tax-saving schemes mentioned above, you will be able to get the maximum benefit on your real-estate investment.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.