What is the difference between selling a residential house and a residential plot? If I were to sell a residential plot (approved by municipal authority as a residential plot) with no building, do I need to invest the complete sale proceeds to avoid paying long-term capital gains (LTCG) tax or can I avail benefits of indexed costs and only profits are considered while computing LTCG?

—Ashu

From a tax computation perspective, the manner of classification as long term and computing gross LTCG on the sale of a residential house and a residential plot is identical. LTCG is computed as sales consideration less indexed cost of acquisition less indexed cost of improvement. However, availability of exemptions on such LTCG towards reinvestment in a new asset may vary. 

In the case of sale of a residential plot, an exemption can be sought in any of the following ways:

1) Under Section 54F of the Income-tax Act, 1961, by investing the net consideration in a new residential house situated in India. If the cost of the new residential house is not less than the net consideration, then the whole of LTCG is exempt from tax. Otherwise, LTCG will be tax-exempt in the same proportion that the cost of the new residential house bears to the net consideration. Net consideration means the sale value less expenses incurred wholly with respect to such transfer. 2) Under Section 54EC of the Act, by investing the capital gains in specified bonds. 3) Under Section 54GB of the Act, by investing the net consideration in equity shares of an eligible start-up. 

In case of sale of a residential house, exemptions under Sections 54EC and 54GB of the Act are identical. While exemption under Section 54F of the Act does not apply on sale of a residential house, exemption under Section 54 of the Act can be availed by investing LTCG in another residential house in India (as against investing net consideration as per Section 54F of the Act, in case of sale of residential plot). 

All above exemptions are subject to the other prescribed conditions and timelines.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India. Queries and views at mintmoney@livemint.com

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