Exemption available under Capital Gain in case of Sale of Residential Plot of Land

The Income Tax Act, 1961 is a comprehensive statute that provides for levy, administration, collection and recovery of the direct taxes in India. The act came into existence w.e.f. April 1st, 1962 and contains various chapters and section.

Every year, the Finance Minister of our Country introduces new budget for the upcoming financial year. After the Finance bill is passed by both the houses of the Parliament and receives Presidential assent, it becomes an Act. The Finance Act for a particular financial year also includes the amendments that have been made with respect to Direct Taxes.

The amendments are made to provide relief, clarity and remove loop holes present in the system so as to curb tax evasion. As relief measures, the government provides various exemptions, deductions whose benefits can be availed by the taxpayers while filing their return of income and these reliefs on the other hand encourages the taxpayers to report all their transactions.

In this blog, we would highlight the benefits available to Individuals/HUF on sale of residential plot of land from the capital gain perspective.

Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year will be chargeable to income-tax under the head Capital Gains.

Section 2(14) of the Income Tax Act, 1961 provides the definition of Capital Asset. Capital asset is defined to include:

• Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
• Any securities held by a Foreign Institutional Investors which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the category of capital asset:

• Any stock, consumables or raw material, held for the purpose of business or profession
• Personal goods such as clothes and furniture held for personal use
• Agricultural land in rural India
• 6½% gold bonds (1977) or 7% gold bonds (1980) or national defense gold bonds (1980) issued by the central government
• Special bearer bonds (1991)
• Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetization Scheme, 2015.

Capital Gain can be classified into two depending upon the period of holding:

• Short Term Capital Gain
• Long Term Capital Gain

In case of Sale of Immovable Property, the capital gain is classified as follows:

Scenario:

Suppose an individual want to sell a residential plot of land and make such investment so that he could avail the capital gain exemption benefit. The details of immovable property held in his name on the date of transfer:

• 2 residential houses in India
• 1 agricultural plot of land in India
• 1 residential plot of land in India

Section 54EC of the Income Tax Act, 1961

According to this section, long term capital gains arising from the transfer of any long term capital asset are exempt under section 54EC if the assessee has within a period of 6 months after the due date of such transfer invested the capital gain in long term specified assets (specified bonds as notified by the Govt*.) for a minimum period of 3 to 5 years.

Conditions to be satisfied for exemption:

• The exemption is available only towards the capital gain arisen on account of transfer of long term capital asset (being land or building or both).
• The assessee has invested the amount of capital gain (wholly or partly) in the long term specified assets.
• The gain should be invested within a period of 6 months from the date of transfer.
• The investment in the bonds (from the capital gain arising from the transfer of one or more land or building or both) cannot exceed Rs. 50 Lakhs during the financial year in which the land or building or both is transferred and in the subsequent financial year.

Amount of exemption (lower of the following):

• Amount of capital gain invested in the long term specified assets; or
• Rs. 50 Lakhs

Withdrawal of exemption:

• The exemption claimed would be withdrawn if the bonds are transferred or converted into the money before the expiry of the period of three years or five years as applicable.

Bonds specified by the government for the investment (issued on or after April 1, 2018):

• National Highway Authority of India.
• Rural Electrification Corporation Limited.
• Any other bond as notified in the official gazette.

Above mentioned bonds are redeemable only after 5 years.

Apart from the above mentioned section, exemption could have been claimed u/s 54F if assessee did not own more than one residential property on the date of transfer.

Conclusion: The assessee can sale the plot of land and invest the capital gains up to maximum of Rs. 50 Lakhs in the government specified bonds as mentioned above. If the capital gain is more than Rs.50 lakhs then invest Rs.50lakhs in above mentioned bonds and pay capital gain taxes @ 20% on remaining amount.