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Save Tax on Selling Plot of Land

    IndianMoney.com Research Team | Tuesday, January 20,2015, 03:21 PM
 

Buying a plot of land is the path to riches. You now own something really valuable which you can call your own.

quote by anthony trollope

The plot of land you had bought on the outskirts of your city a few years ago is worth several lakhs. You are tempted to sell it and reap a huge profit.

But tax is a worry.....

Saving on your long term capital gains tax is your main priority.You need to save tax on selling plot of land.

What is LTCG tax on a plot of land?

If you own a plot of land and sell it after 3 years from the date you purchased it for a profit (capital gain), you are taxed on the profit you make. This tax is called a long term capital gains tax.

Remember: You have to hold the plot of land for at least 3 years for your gains (profits) to be called a long term capital gain. Your long term capital gain is taxed at 20% with an indexation benefit.

You can reap the benefits of a lower tax on your long term capital gains through indexation.

But you still have to pay tax.....

What if you don’t want to pay LTCG tax at all?

You can make use of Section 54 F to save on your long term capital gains by selling your plot of land.

You can sell your plot of land for a long term capital gain and invest the gain (profits) in a residential house/apartment.

You can claim a tax exemption under Section 54 F on your LTCG obtained on the sale of a long term asset other than residential house/property say a plot of land.

The LTCG is exempt if invested in :

  • The purchase of a residential house/property within 1 year before or within two years of the sale of the plot of land.
  • You construct a new residential house within a time period of 3 years after selling the plot of land.

How much of LTCG can you save by using Section 54 F?

  • If the LTCG you get from the sale of your plot of land is equal to or less than the cost of the new house/apartment purchased then the entire capital gain is exempt from tax.
  • If the LTCG obtained from the sale of your plot of land is greater than the cost of the new house purchased then the amount up to the cost of the new house is allowed as a tax exemption. The amount which exceeds the cost of the house is taxed at 20% with an indexation benefit.
  • You have to invest your LTCG in a single residential house/apartment only within India no matter how high the capital gain.

What if you already own a house or an apartment?

You can still avail the benefits of Section 54 F on the LTCG you make on selling your plot of land if you already own a residential flat or a house.

You should not own more than a single house/apartment (other than the house/apartment you would buy on the sale of the plot of land).

Don’t want to invest in a new house immediately

You can deposit your LTCG in a capital gains account scheme before the due date of filing your income tax returns.

You can withdraw this money and then invest in the residential house/apartment within the time specified (3 years).

If you do not buy/construct a new house within the specified time period (3 years) the money not used (invested in the capital gains account scheme), will be taxed as an LTCG in the financial year which is 3 years after the sale of the plot of land.

What if you sell your new house/apartment bought with the LTCG of your plot of land within 3 years of its purchase?

If you sell your new house/apartment in a time period less than 3 years from the date of acquisition (Date you purchased the new house) then the LTCG you enjoy under Section 54 F is reversed (taken back) and the LTCG will be taxable in the year of transfer of the new house.

Use tax saving bonds to save on your LTCG taxes

You can claim a tax exemption under Section 54 EC on the long term capital gains obtained on the sale of the plot of land provided you invest the capital gains within a period of 6 months of the sale in certain specific long term bonds such as the REC and the NHAI bonds.

These bonds have to be held for at least 3 years (lock in of 3 years) and the interest earned on these bonds is taxed.

You are exempted only INR 50 Lakhs in tax saving bonds even if investments are made over two financial years.

You have heard the popular saving “Knowledge Is Power”. For you knowledge can be money. Learn how your LTCG gains are taxed when you sell your plot of land and save on your tax.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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