Case Study 1

Scenario: I want to sell a part of my own land. Is there any way to save on capital gains tax?

Solution

If the land has been held for more than 24 months, it will be considered long-term capital asset . Similarly, if the land has been held for less than 24 months, it will be considered short-term capital asset .

In the case of short-term capital gains, the profits are taxed at slab rates. However, in the case of long-term capital gains, the taxpayer has 2 options available to save capital gains.

The first option, described in Section 54F of the Income Tax Act, provides an exemption if the sale proceeds are used to purchase or construct a residential house. To qualify, the individual must invest the money within two years after the sale or one year before the sale date. Alternatively, if you construct a house within three years and invest the total consideration, you can also claim the exemption.

Another option under Section 54EC allows you to invest in capital gains bonds issued by specific financial institutions, such as REC (Rural Electrification Corporation), NHAI (National Highway Authority of India), PFC (Power Finance Corporation), and RFC (Railway Finance Corporation). To qualify for the exemption under Section 54EC, you only need to invest the indexed long-term capital gains in these bonds, not the entire sale consideration.

The entire sale consideration is not required for investment under Section 54EC; only a portion up to Rs. 50 lakh can be claimed as an exemption in a single financial year. This investment must be made within six months of the property sale date, even if this period extends beyond the income tax return filing deadline.

Case Study 2

Scenario: As an NRI residing in Canada, I am faced with a situation where my traditional house property in India is being sold. Now I want to save tax, and that’s why I am seeking advice. Can you properly guide me?

Solution

To reduce his long-term capital gains tax, the taxpayer has two options under the Income Tax Act (ITA). First, he can invest the capital gains in a residential house property in India, following the guidelines of Section 54 of the Income Tax Act. This allows him to purchase a new residential house property within one year before the property's sale, within two years after the sale, or construct a new RHP within three years after the sale. Alternatively, he can invest in specific long-term bonds in India under Section 54EC of the ITA.

Additionally, Section 54EC of the ITA provides him with an option to save on taxes by investing the capital gains in long-term bonds issued by entities such as the National Highways Authority of India (NHAI) and the Rural Electrification Corporation Limited (RECL) within six months of the property’s sale.

Case Study 3

Scenario: I had an LTCG of Rs.50 lakhs on the sale of a residential property in Jaipur in 2023. However, I am not ready to reinvest the LTCG amount to purchase a new property immediately. How can I save tax?

Solution

If the taxpayer is not able to invest in a new property immediately, he can deposit the LTCG amount in a CGAS account until he is ready to reinvest it and claim the Section 54 exemption. However, he must reinvest these funds within two years of depositing the amount to avail of the exemption. If he fails to reinvest the CGAS amount within two years, the exemption will be withdrawn.