The most effective method to save tax on Long Term Capital Gain

Land is a Capital Asset and as an acknowledged resource, a landlord can generate huge capital gains on its sale. In any case, agricultural land in a rural area in India isn't considered as a Capital Asset. Therefore, on a sale of Capital Asset there is no Capital Gain. Before discover how your Capital Gains shall be taxed, do ensure Income Tax considers your asset to be a Capital Gain.

As per IT Act there are exemptions mentioned u/s Sec 54 & 54F to save tax on capital gains.

(1)Exemption u/s Section 54 is available on long-term Capital Gain on sale of a House Property.

(2) Exemption u/s Section 54F is available on long-term Capital Gain on sale of any asset other than a House Property.

Note: Both exemptions can avail only on long-term capital gains.

Common requirements between the two Sections:

1. A new residential house property must be bought or built to claim the exemption.
2. The new residential house property must be purchased either 1 year before the sale or 2 years after the sale of the property/asset.
3. Or the new residential house must be constructed within 3 years of sale of the property/asset
4. If you are ready to invest the specified sum in the way expressed above before the date of tax filing or before 1 year from the date of sale, whichever is prior, deposit the specified sum in a public sector bank (or other banks according to the Capital Gains Account Scheme, 1988).
5. Only one house property can be bought or built.
6. Starting FY 2014-15 it is compulsory that this new residential property must be situated in India. The exemption will not be accessible for properties bought or built outside India to claim this exemption.

Differences between these two Sections

Section 54

• To claim full exemption the whole sum of capital gains must be invested.
• In case whole capital gains are not invested - the sum  not invested is charged to tax as long-term capital gains.
• This exemption will be turned around in the event that you sell this new property within 3 years of procurement and capital gains from sale of the new property will be taxed as short-term capital gains.

Section 54F

• To claim full exemption the whole sale receipts must be invested.
• In case whole sale receipts are not invested, the exemption is allowed proportionately.
  [Exemption = Cost the new house x Capital Gains/Sale Receipts]
• You should not possess more than one residential house at the time of sale of the original asset.
• This exemption will be turned around in the event that you sell this new property within 3 years of its purchase or construction or in the event that you purchase another residential house within 2 years of the sale of the original asset or built a residential house other than the new house within 3 years of sale of the original asset. Capital gains from the sale will be burdened as long-term capital gains.

Key points to remember

• If the expense of the new residential property is less than the absolute sale amount, at that point the exemption is allowed proportionately. For the rest of the sum, you can reinvest the money under Section 54EC within a half year.
• The property should only be purchased on the name of the vender and not on other individual's name.
• If the builder of the new residential development neglects to hand over the property to the taxpayer or citizen within 3 years of purchase, the exemption is still permitted.

Lalita Sharma

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