Income tax on land sale: The long term capital gain shall be calculated by deducting the indexed cost of purchase of the plot from the sale price
Question: I had purchased a plot of land in January 2004 for Rs. 5 lakh and sold it in March 2021 for 59 lakh. How much tax will I have to pay or what can I do for saving the tax. (Name withheld on request)
Answer: Since the plot was held by you for a period more than 24 months, the gain on sale of this shall be treated as long term capital gain. The long term capital gain shall be calculated by deducting the indexed cost of purchase of the plot from the sale price. The cost inflation index for 2003-2004 was 109 whereas for the year 2020-21 it was 301. Based on the respective cost inflation index of purchase and sale, the indexed cost for your plot comes to Rs. 13.81 lakh. Therefore, the indexed long term capital gains shall be Rs.45.19 lakh. You have to pay tax at flat rate of 20% and cess of 4% on such tax if you do not wish to avail any avenue for exemption of long term capital gains.
First option is to invest the sale consideration to purchase a house within two year or get a house constructed within three years from the date of sale of the plot as per the provisions of Section 54 F of the Income Tax Act. In case the full sale consideration is not utilized for acquisition of a residential house before the due date of filing of your income tax return, which as extended is 30th September 2021, you need to deposit the unutilized amount in an account under Capital Gain Account Scheme with a bank. This money should be used within the original time of two years or three years for purpose of purchase or construction of the house. In case you fail to do so the same will become taxable in your hand after expiry of the period.
The second option is to invest the indexed long term capital gains of Rs. 45.19 lakh in capital gains bonds of specified financial institutions within a period of six months from the date of sale of the plot under section 54EC of the income tax Act. Please note that you cannot invest more than 50 lakhs under Section 54 EC in one financial year. The bonds have a duration of five years and presently carry annual interest rate of 5%.
Please note that in case you do not invest the full sale consideration for acquiring the house or invest full indexed capital gains in the bonds, you will get exemption only proportionately.
Balwant Jain is a tax and investment expert and can be reached at firstname.lastname@example.org