I own a plot of land which I want to sell. How can I save capital gains tax?

I am planning to sell a plot of land I own. What are the best ways to minimize or save on capital gains tax?
Reply by Balwant Jain, a tax expert

You can save tax only if the you have held the plot for more than 24 months. In case the plot, which you want to sell, was held for 24 months or less, the profit on sale of it will be treated as short-term capital gains.

Such short term capital gains are to be included in your regular income and are taxed at the slab rate applicable to you.

In case you are selling the plot after holding for 24 months or more, the profits which are treated long term capital gains and you have two option to save such long term capital gains. The first option is available under Section 54F where you will get exemption from tax on long term capital gains if you purchase or construct a residential house.

For claiming this exemption, you have to invest full sale consideration of sale of such plot for purchase/construction of a residential house. In case full sale consideration is not invested, you will get exemption in proportion in which you invest the net consideration for the above purpose.

The capital gains for the purpose of partial exemption are to be computed by reducing the cost of the plot from sale price of the plot as the benefit of indexation is no longer available in respect of exemption under Section 54F for partial exemption.

You can save tax on long term capital gains if you buy a residential house within two years after or one year before from the date of sale of the plot. You can also claim the exemption even if you self-construct a house or book an under construction residential house construction of which should get completed within three years.

Please note that in case you are not able to utilise whole of the money for the above purpose before due date of filing of your return of income, you need to deposit the unutilized money in capital gains deposit account to be opened with a scheduled bank. You can use the money so deposited for the purchase or construction of the house within the required time period.

The other option to save long term capital gains tax is available to you under Section 54EC where you have to invest unindexed capital gains in capital gain bonds of specified financial institutions within six months from date of sale of the plot. The specified financial institutions are REC (Rural Electrification Corporation), NHAI (National Highway Authority of India), PFC (Power Finance Corporation)) and RFC (Railway Finance Corporation).

Please note that to claim exemption under Section 54EC you have to invest only the capital gains and not the whole of the sale consideration in the bonds. There is a maximum limit of Rs. 50 lakhs upto which one can invest in bonds for claiming capital gains for one year as well as amount one can invest in a financial year.

The period of six months can even go beyond your due date of filing of your return and you are not required to put the unutilized money in capital gains deposit account.

(Views expressed by the expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts)