[How to] Save Capital Gains Tax on Sale of Property in India

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Over the years, property is one of the high ticket items in one’s investment portfolio. Now the buying / selling are more frequent with good appreication. However, the investor needs to consider taxation aspects when buying & selling properties.

Any profit earned on sale of property is taxed as Capital Gains. The amount of tax depends of holding period of the property.

  Short Term Capital Gain Long Term Capital Gain
Holding Period Asset Held of less than 3 years Asset Held of more than 3 years
Tax Added to Income and taxed at Individual’s slab rates 20% after Indexation

For long term capital gain, tax liability is determined based on indexed cost of acquisition and improvement.  Check – Cost Inflation Index & Calculation

How to Save Capital Gains Tax on Sale of Property in India

 a) Invest in a Residential House (Buy / Construct)  (Under section 54F)

 The seller of the property can claim for tax exemption if he buy another essential property. However, the amount of investment & exemption depends on the type of Capital asset sold. .

If Capital Gains is from  Sale of  Amount to be invested
Residential property (Completed / Ready to Move) entire Profit (capital gain)
Under Construction Property / Commercial /
Non Agricultural Land
entire SALE Proceeds

 

The seller has two options, either he can buy another house within two year from sale of property else he can build a house in three years.   Buyer can also buy a house 1 year prior to selling the house and still can avail the benefit under section 54.

However, following conditions needs to be adhered

  • You can only invest in Residential property. This means you cannot invest in a commercial property or land to save tax.
  • You should not own more than one house prior to the investment.
  • If the new house is sold within three years, the deduction claimed will become taxable as a long-term gain.
  • if any additional house (other than the new residential house referred above), is purchased within a period of two years or constructs within a period of three years after the date of transfer of capital asset, then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired

Capital Gains Accounts scheme –   If you could not invest the amount in another property before due date if filing the returns, you can deposit the amount into a bank account under the Capital Gains Accounts Scheme, 1988. Such amount would have to be utilized for the purchase or construction of the new asset within the prescribed time period. Unutilized amounts would be taxable as income of the previous year in which the period of 3 years from the date of the transfer of the original asset expires.

2) Invest in Capital Gain Bonds (Section 54EC)

Irrespective of the type of property, here you need to just Invest profit (capital gains) into Capital Gains Bonds. You can invest in NHAI or REC Bonds upto 50 lakhs in an year.

There is a Lock in of 3 years for such investment.  If you transfer or take a loan against these bonds within three years, the capital gain will become taxable.

Important Note –  If you have Capital gains from Under Construction Property / Commercial / Non Agricultural Land –    then this option is more beneficial as you need to invest only profit amount & not the entire sale amount.

 


For calculating Capital Gains, the date of Acquisition is quite important to calculate the index cost. 

Date of Acquisition of Capital Asset

1) Completed Ready to Move Properties (Residential / Commercial / Land etc)

 Date of Acquisition – will be Date of Sale deed registration

 

2) Under Construction Properties  (Important to Read) 

 If the property is under construction, you don’t have the physical property yet. What you have is “RIGHT TO ACQUIRE” a particular property.

When you book a flat, you pay a token amount as Booking amount for which a receipt will be issued by builder.  Once the layout is finalised, letter of allotment is issued and an agreement to purchase is executed and registered.

If you have merely booked a flat in the building to be constructed with no particular flat having been allotted to you, you cannot be said to have acquired the right to purchase a specific flat.

It is only when the letter of allotment is issued that such a right can be said to have come into existence. The purchase agreement defines the rights between the parties, which have already come into existence after the issue of the letter of allotment.

Thus, the date of issue of an allotment letter gives a right to the intended buyer to obtain conveyance on the said flat so that it becomes an asset within the purview of the Income-tax Act.

The date of acquisition of the said asset (“Right to Acquire”) shall be the date on which the allotment letter is issued to the intended buyer.

Normally, in cases of sale of under construction properties, a tripartite agreement is entered into between the seller (who had originally booked the flat), the purchaser and the builder.   Under this agreement, the seller assigns his rights to the under-construction flat to the purchaser with the consent of the builder, the purchaser agrees to pay the balance of the original purchase price payable to the builder and the builder agrees to give possession of the ready flat to the purchaser directly.

The agreement assigns the right to acquire a particular flat.

IMPORTANT NOTE  Once the possession is given, then the new date of Sale deed registration of property will be treated as New date of Acquisition, as now you will have a NEW Asset. 

So if you intend to sell property in near future, it is better to sale before possession / deed registration. Otherwise, you will have to wait for another 3 years to get benefit of Long term capital gain.

Recently, High court has taken a view that – for calculating Long term capital gains, the date of allotment should be treated as date of purchase. Link

353 Replies to “[How to] Save Capital Gains Tax on Sale of Property in India”

  1. I intend to buy a under construction property for investment purpose. The property will be registered immediately wherein the possession will be after 2-3 years. my queries are :
    1) if i sell the property after taking the possession which will be after 3 years from the date of allotment which also is the date of registration then will it be liable for long term capital gain or is it that since the possession has happened, so the 3 year period for the eligibility of long term capital gain will start a fresh from the date of possession even though the property has been registered 3 years back when it was under construction.
    2) If i sell it in under construction status after 3 years from the allotment date which also is the date of registration then will it be liable for long term capital gain or is it that since the construction has taken more than 3 years and therefore benefit of long term capital gain may not apply.
    Please advice.

    1. 1) if you sell the property after taking the possession, then you will have to wait for 3 years after dat eo possession to get benefit of long term capital gain.

      2) if you sell under-construction property, you can sell it after 3 years from allotment date & it will be treated as Long term capital gain.

      1. dear sir,
        please let me know about the capital gain. if the house property purchased in 1996 constructed in 1997 sold out in the year april 2013 and again constructed the house will full investment of proceeds received.
        now again the house property sold after two year occupation
        please let me know about the capital gain liability or any other process to save the tax
        again we are in process to buy a new house. please guide
        thanks
        manish

        1. H Manish, If the new property is sold Isold within three years, the original deduction claimed will become taxable as a long-term gain.

          In this case, you will have to pay LTCG of the sale of old property.

  2. Hi,
    Thanks for the informative article. I’m buying a flat where the seller did agreement with the builder in 2009, got possession in 2011, but did not do sale deed yet (NRI who didn’t have time to complete). Now he says 3 year holding period starts from possession date. Whereas your article says 3 year holding period starts from sale deed date. Which is right? And is there an official IT site that clarifies?

    Thanks.

    1. the holding period is always debatable and depends on the facts of the case.

      However, in general practice date of registration and date of possession is same but in some cases it may be different so if amount is paid and possession is given even registration is pending then transfer date will be date of possession by the purchaser under section 53A of transfer of Property Act as explained in definition of “transfer” under Income Tax Act

  3. I have a residential flat, a commercial shop and a NA land each one current price 20 lac each. All bought more than 10 yrs ago. Now I intend to sell all three and buy a commercial property of 60 lac as it is giving me good rentals. How do I go about it n how will capital gain apply on me. ..

    1. You need to calculate the Capital gain for all 3 properties.

      As you will invest the proceeds into commercial property, you cannot save any capital gain tax.

  4. Dear Sir,

    I need advice on a property transaction-selling an under-construction flat for which I also had a Housing Loan.

    I has bought the under-construction flat in June, 2010 and sold it in Apr,2014. In between I had taken a Home Loan too for which I was paying pre-EMIs. When I sold the flat in yet under-construction stage, I paid of the Bank Loan and have invested balance proceeds(Profit+ Principal) into Bank FD till I find another suitable property to invest.

    To avoid any Capital gains, what percentage of above amount do I have to invest into new property?

    Please advise

    1. For capital gains from sale of under-constructed property, you need to invest the entire Sale amount.
      If you donot invest in another residential property in same financial year, then you need to put the money in Capital gains savings scheme till the time you buy the property.

        1. Hi Ramesh, To save Long term capital gain tax, you can invest the Capital Gain amount in any residential property (new/ resale / contruction).

  5. I invested in an under construction property in 2009. Letter of allotment : may 2009
    Registration and Final sale Agreement : Mar 2012 . Letter of possession for fit out : Oct 2012
    Letter of final possession : February 2014
    For long term capital gain to be applicable in place of short term cap. Gain what date would be considered for
    the 3 year period

    1. As the property is finalized in Feb 2014, the date of possession will be treated as Acquisition date for house property asset.

  6. Dear Mr. Vivek, 1st of all I would like to thank you for such a detailed clarification on the subject. I have couple of queries:

    1. I had purchased a flat in Calcutta in December 2011 (possession was given in August 2012). As I wanted to sell it after 3 years, I have not done the registration till date. What would be the calculation for the date of acquisition then (as I have not done the registration, and the builder would transfer the property in the proposed seller’s name by taking the transfer fee from me). Would I be able to claim under Section 54F? (I own as second applicant 2 other properties that are owned by parents in Calcutta). I had purchased another flat (solely in my name) in Bhubaneswar in January 2013 by taking a bank loan and another flat in Calcutta in November 2014.

    2. In case in future, I sell all these 3 flats owned solely in my name and club all the amount to construct a house on a land owned by me, then can I do so and avoid long term capital gains that would accrue on all these 3 flats?

    thanking you in anticipation of your time and responses

    1. 1) As the possession is given, the date of possession should be treated as Date of Acquisition
      2) You cannot claim benefit of 54F as you already hold other properties.
      3) Once you sell your 3 properties, and invest in house, even then you will not be able to claim as you are owner of other properties jointly with your parents.