Selling land and getting a good return is easy what difficult is the tax implications on the land sold. The case of sale of land comes under the chapter “Capital Gains” of Income Tax Act, 1961. When there is profit in sale of land it is called Capital Gain and if there is loss in sale it is called Capital Loss.
You have to pay tax on your Capital Gains and your Capital Loss can be used to set off only Capital Gain of that year and can be carried forward also. Gain on sale of Agricultural Land is not taxable.
Capital Gain are of two types:
- Short Term Capital Gain
- Long Term Capital Gain
Short Term Capital Gain (STCG)– If Land is sold within 24 months from date of acquisition or transfer then the gain on sale will be STCG.
Long Term Capital Gain (LTCG)- If Land is sold after 24 months of acquisition or transfer then the gain will be LTCG.
How to Calculate Income Tax on sale of land?
It is not necessary that the actual profit you make from the sale of land will be the same as Capital Gain on which tax is to be paid. The Income Tax Act has prescribed a method in order to help us calculate our Capital Gain.
Calculation of STCG on Land
| Particular | Amount Rs |
| Sale Value/ Full Value Consideration of Land | xxx |
| (-) Expenses in connection with sale e.g. brokerage , stamp duty | (xxx) |
| (-) Cost of Acquisition | (xxx) |
| (-) Cost of Improvement | (xxx) |
| Short- term Capital Gain | XXX |
Calculation of LTCG on Land
| Particular | Amount Rs |
| Sale Value/ Full Value Consideration of Land | xxx |
| (-) Expenses in connection with sale e.g. brokerage , stamp duty | (xxx) |
| (-) Indexed Cost of Acquisition | (xxx) |
| (-) Indexed Cost of Improvement | (xxx) |
| Long – term Capital Gain(before deductions) | XXX |
| (-) Deduction u/s 54F , 54EC | (xxx) |
| Long- term Capital Gain | XXX |
Indexation is done to account for the rise in value of an asset due to inflation, the Income Tax Act has introduced the Cost Inflation Index (CII). The table below gives the cost inflation index for the past five yeaRs –
| Financial Year | Cost Inflation Index |
| 2020-21 | 301 |
| 2019-20 | 289 |
| 2018-19 | 280 |
| 2017-18 | 272 |
| 2016-17 | 264 |
| 2015-16 | 254 |
| 2014-15 | 240 |
| 2013-14 | 220 |
| 2012-13 | 200 |
| 2011-12 | 184 |
| 2010-11 | 167 |
Read Also: Income Tax Rules on Capital Gains – Types, Tax rates, computation, exemption
The formula to calculate inflation-adjusted cost price is:
Actual cost price X (CII of the year of sale/CII for the year of purchase)
Example: Suppose, you purchased a house in 2012-13 for Rs 20 lakh and sold in FY 2019-20 for Rs 50 lakh. The inflation adjusted cost and LTCG on it will be calculated as follows:
Answer: Inflation adjusted cost or indexed Cost of Acquisition (ICOA): (289/200) X Rs 20 lakhs = Rs 28,90,000
Long term Capital Gain (LTCG) on Land will be= Rs 50,00,000 – Rs 28,90,000 = Rs 21,10,000
Read Also: Income tax on shares and securities in India
How to calculate Income Tax on Capital Gain?
Tax Rate on LTCG on sale of Land = 20%
Tax Rate on STCG on sale of Land = Will be added in the total income and taxed as per slab rate.
Example : Income Tax on STCG
Mr. Kumar (resident and age 40 years ) is a salaried employee working in SM Ltd. at an annual salary of Rs 8,40,000. In December, 2019 he purchased a plot of land for Rs. 10,00,000 and sold the same in March, 2020 for Rs 12,10,000 (brokerage Rs 10,000).What will be the tax liability of Mr. Kumar?
First we have to compute the taxable income of Mr. Kumar and then we will compute the tax liability. The computation of taxable income will be as follows:
| Particulars | Rs . |
| Salary income | 8,40,000 |
| Short-Term Capital Gains (See working 1) | 2,00,000 |
| Gross Total Income | 10,40,000 |
| Less: Deduction under section 80C to 80U | Nil |
| Total Income or Taxable Income | 10,40,000 |
| Tax on total income (See working 2) | 1,24,500 |
Working 1: Computation of STCG
| Particulars | Rs . |
| Full value of consideration (i.e., Sales consideration) | 12,10,000 |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (i.e., brokerage) | (10,000) |
| Net sale consideration | 12,00,000 |
| Less: Cost of acquisition (i.e., purchase price) | (10,00,000) |
| Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset ) | Nil |
| Short-Term Capital Gains | 2,00,000 |
Read Also: Reasons you may get Income Tax Notice
Working 2: The normal tax rates for the financial year 2019-20 applicable to resident an individual below the age of 60 years are as follows:
- Nil up to income of Rs 2,50,000
- 5% for income above Rs 2,50,000 but up to Rs 5,00,000
- 20% for income above Rs 5,00,000 but up to Rs 10,00,000
- 30% for income above Rs 10,00,000.
Apart from above, health & education cess @ 4% will be levied on the amount of tax. Applying the above normal rates, tax on total income of Rs 10,40,000 will come to Rs 1,24,500 plus health & education cess @ 4% on the amount of tax will be levied and the total tax liability will come to Rs 1,29,480.
Read Also: Income Tax Rate For AY- 2020-2021/ FY- 2019-2020
Adjustment against basic exemption limit
Non-residents cannot adjust their LTCG against basic exemption limit. However, residents can do so. Further, no deduction between 80C and 80U can be claimed against LTCG.
Example: Mr. Kapoor (age 67 years and non-resident) is a retired person. He purchased a piece of land (at Delhi) in December, 2012 and sold the same in April, 2019. Taxable long-term capital gain on such sale amounted to Rs. 1,84,000. Apart from gain on sale of land, he is not having any other income. What will be his tax liability for the year 2019-20?
Answer- For non-resident individual of any age, the basic exemption limit is Rs . 2,50,000. Further, a non-resident individual cannot adjust the basic exemption limit against LTCG. Hence, in this case the exemption limit of Rs. 2,50,000 cannot be adjusted against LTCG. In other words, Mr. Kapoor cannot adjust the LTCG on sale of land against the basic exemption limit. Thus, LTCG of Rs . 1,84,000 will be charged to tax @ 20% (plus health & education cess @ 4%). Thus, the tax liability will come to Rs . 38,272.
However, if Mr. Kapoor was a resident then his Basic Exemption Limit would have been Rs 3,00,000 and Capital Gain would be Nil.
Read Also: 8 High return Tax Saving Investment schemes
Income Tax Exemptions on LTCG on sale of Land:
- 54F –Under Section 54F, there is a 100% deduction on the capital gains tax if the entire amount received from selling land is used for purchasing or constructing a house. But note that there are some conditions and limitations to this provision.
- 54EC– Under Section 54EC, if you invest capital gains from sale of land within 6 months of sale in prescribed bonds then you can avail exemption. The eligible bonds under section 54EC include bonds on offer by Rural Electrification Corporation Ltd (REC) and National Highways Authority of India (NHAI). The maximum limit for investing in 54EC bonds is Rs 50 lakhs per financial year, whereas minimum investment is capped at Rs 20,000 and Rs 10,000 respectively in REC and NHAI bonds. These bonds come with a lock-in period of 5 years .
Read Also: 10 new Changes in Income Tax Return Forms for A.Y. 2020-2021
The author of the above article is Manav Khanna.
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