Treatment of Capital Gain Tax on The Sale of Land And Building

When you sell the property, you have to pay the tax on the profit amount. This statement looks so simple but it is not. The reason is, complicated provisions made in the income tax act, 1961 in this regard. However, in this article, I will try to explain to you the whole tax process in a simple manner. 

Capital gain tax on sale of Land and Building

When you sold the property, you may have so many questions like the tax also levied on agriculture land or how can I save the tax or whether I can get the deduction under chapter VI-A. I will also tell you how you can save the taxes on the gain from the sale of land or building. So, let’s begin

Capital Assets (Section 2(14) of Income-tax act, 1961)

As per this section, a capital asset means the property of any kind held by the assessee whether or not connected with his business or profession.

Although this definition includes other points also, here I’m explaining the provision of capital assets restricted to land and building.

There are also some exclusions that have been made to this definition which includes the rural agriculture land. So if you sold any rural agriculture land then such a sale shall not attract any capital gain tax because such land is not a capital asset. So the question arises when you called a land as rural agriculture land.

Rural Agriculture land means the agriculture land situated in India and the following agriculture land situated in India shall not be treated as rural agriculture land and shall be a capital asset.

  • In the area within the jurisdiction of the municipality which has a population of more than 10000 or
  • In the above area having a population within the following limits:

Up to 2 Km from the municipality whose population of more than 10000 but up to 100000 

Up to 6 Km from the municipality whose population of more than 100000 but up to 1000000

Up to 8 Km from the municipality whose population of more than 1000000

Agriculture land situated outside India shall always be a capital asset.

Hence if a person transfers any capital assets then he shall be liable for the payment of capital gain tax. Now another question arises, what is the meaning of transfer.

Section 2(47) defines the term “Transfer includes a sale, exchange or relinquishment of the assets or extinguishment of any rights therein or compulsory acquisition thereof under any law.

The assessee shall be liable for the payment of capital gain tax in the previous year in which such gain has been accrued and not in the previous year in which he received the sale amount.

Gain can be short term capital gain and long term capital gain and it all depends upon the type of assets. It is important to know whether the land or building being sold, is a long term capital asset or short term capital assets because the calculation of tax liability is different in both kinds of assets.

It is to be noted that where the land and building are two different identifiable, distinct capital assets and independent hence the capital gain shall also be calculated separately for land and building. For more clarification, I will give you one example but before this, it is important to understand when assets shall be called long term capital assets and when it called short term capital assets.

Immovable property is a land or building shall be called long term capital assets if it is held for more than 24 months and if such assets are being held by the assessee for a period up to 24 months than such assets shall be called as short term capital assets. Although, the said time limit was 36 months before FY 17-18.

Now let’s explain the whole provision with an example:

Mr. A is having land which he purchased in June 2008 and he constructed the building on such land in December 2018. Here, the land was purchased in the year 2008 hence the land part is a long term capital asset and the building which was built in 2018, shall be called short term capital assets. Now, if Mr. A sold the building then on the land part, long term capital gain shall be chargeable and on the building part, short term capital gain shall be levied.

TDS Certificate

Computation of capital gain

The capital gain shall be calculated in the following manner

Particulars Amount
The full value of sale consideration xxx
Less: Expenses incurred in connection with the sale xxx
Net Consideration xxx
Less: Cost of Acquisition xxx
Less: Cost of Improvement xxx
Capital Gain xxx

If the capital gain results in the long term capital gain then the cost of acquisition shall be taken after indexation. It means if the property which has been acquired for more than 2 years, is being sold then its cost shall be taken after considering the inflation i.e. the indexed cost of acquisition. The cost of the index for the FY 18-19 is 280.

Now, we will discuss the most important provisions of capital gain which need to take care while selling the immovable property and which is section 50C of Income-tax act, 1961.

Where on the sale of land or building or both, the sale consideration received or accrued is being less than the value which has been assessed or assessable by the stamp valuation authority for the payment of stamp duty, then the value so assessed or assessable shall be deemed to be the sale consideration.

However, where the assessee claims that the value of the property so assessed or assessable exceeds the FMV of the property and the value so assessed or assessable has not been disputed in any appeal or revision before any court or authority then the assessing officer may refer the case to the valuation officer who shall determined the correct value of the property and the assessee shall be liable for the payment on the amount as determined by the valuation officer. 

Although the finance act, 2018 has given some relaxation to this section i.e. if the stamp duty value does not exceed 105% of the sale price then actual sale price shall be taken as sale consideration and not the stamp duty value.

This can be illustrated by way of an example.

For example, Mr. Nikhil entered into the agreement to sell his house property on 01.01.2019 with Mr. Mohit for Rs.200 lakhs and the stamp duty value as on that date is Rs.210 lakhs. Mr. Nikhil has acquired the property on 01.01.2019 for Rs. 70 Lakhs. Mr. Mohit has paid Rs.5 Lakh as cheque on 01.01.2019 and cheque was cleared on 03.01.2019

The possession is given to Mr. Mohit on 30.06.2019 when Mr. Mohit pays the balance Rs. 195 Lakhs and the registration of the property I the name of Mr, Mohit took place on 30.06.2019. However, stamp duty value as on 30.06.2019 has been increased by the state government to Rs.230 Lakhs

Here the stamp duty value on the date of agreement shall be taken since the part consideration has been paid by cheque and before the date of transfer. Also as per the amendment in finance act,2018, since SDV of Rs.210 Lakhs does no exceeds 105% of the actual sale price of Rs. 200 lakhs(i.e., 105% of 200 Lakhs = Rs. 210 Lakhs), the actual sales price of Rs.200 Lakhs shall be taken as sales consideration and capital gain shall be calculated in the following manner:

Period of holding: 01.01.2010 to 29.06.2019

Particulars Amount
Sale price (Section 50 C shall not apply) Rs.200
Less: Cost of acquisition Rs.140 Lakhs
LTCG 60 Lakhs

NRI property

Let’s take one more example for more clarification

Mr. A has acquired land during the year 2002 at a total cost of Rs.60,00,000/including transfer and development expenditure incurred during the same year. After that, he completed the construction of a building on the above land at a total cost of Rs.7,00,0000/ during the year 2007. He sold the land and building together for a lump sum consideration of Rs 60,00,000/ in the year 2018. The value adopted by the Registration Authority for stamp duty purposes for both land and building is  Rs.35,00,000/. The market value furnished in Annexure IA to the sale deed for the land is 35,00,000 and the building is Rs 25,00,000/.

Computation of long term Capital Gain for the transfer of land and Building separately

Particulars Land Building
Sale consideration Rs. 35,00,000 Rs. 25,00,000
Less    
Indexed cost of acquisition Rs.  16,00,000 Rs. 15,19,380
Long term capital gains Rs. 19,00,000 Rs. 9,80,620

In the above example, as the actual sale consideration received by Mr. A from his transferee is more than the value adopted by the Registration Authority for the purpose of stamp duty, then the same would be required to be considered as the value of sale consideration for the purpose of computing the long term capital gains and as both the immovable assets have been held by the assessee for more than 24 months without claiming depreciation on the building, the same has been considered to be long term assets.

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