How to Save Capital Gain Tax on Sale of Commercial Property?
- Blog|Income Tax|
- 5 Min Read
- By Taxmann
- |
- Last Updated on 9 May, 2024
Latest from Taxmann
What is the capital gains tax on the sale of commercial property? In India, capital gains tax is applied to the profit made from the sale of a commercial property. Here is how it works: Short-Term Capital Gains (STCG): If the commercial property is sold within 36 months of purchase, the gain is considered short-term and is taxed according to the individual's income tax slab rates. Long-Term Capital Gains (LTCG): If the property is held for more than 36 months before selling, the gain is considered long-term. LTCG on commercial property is taxed at 20% with indexation benefits. Indexation adjusts the purchase cost of the property to reflect inflation, effectively reducing the taxable gain.
Additional charges such as surcharge and cess may also apply, depending on the total income and other specifics of the taxpayer.
Table of Contents
- Introduction
- What is Capital Asset?
- What is Commercial Property?
- What is Capital Gain?
- How to Save Tax on Sale of Commercial Property?
- Conclusion
1. Introduction
Investment in real estate has been one of the most ancient and great sources of investment towards building a continuous and stable income ensuring financial security. It is an age old practice in India, that existed even before the advent of various financial instruments viz equity, mutual funds and the like. Investment in commercial properties is done mainly with the purpose of either own use or letting it out.
2. What is Capital Asset?
When one sells a commercial/residential property or a plot or even shares/bonds, whatever gain is made, the same is taxed under the head “Capital Gains” under Income-tax Act, 1961 and the asset is classified as Capital Asset. The only exemption in this case is for agricultural property, hence, when a rural agricultural property is sold, the gain on sale of such property is not taxed under the head “Capital Gains”.
3. What is Commercial Property?
A Commercial Property refers to a real estate which is used for business activities. When a shop or an office building is let out, then in case of sale of such property, the gain is taxed under the head “Capital Gains”, whereas any rent received on the same is taxed under the head “Income from House Property”. Commercial property thus, typically refers to a building that house businesses, land that is intended to make a profit, and larger residential rental properties.
4. What is Capital Gain?
A property which is bought and not sold within a period of 24 months, is classified as Long-Term Capital Asset. Any property which is held for a period of more than 24 months is categorized as Long-Term Capital Asset and gains arising on its sale are called Long-Term Capital Gains (hereinafter called LTCG). Whereas, if the property is sold before 24 months, then gains arising on its sale are classified as Short-Term Capital Gains (hereinafter called STCG).
This bifurcation is important for the reason that LTCG is taxed at the rate of 20% whereas STCG is taxed as per the slab rates applicable to the assessee in due course.
5. How to Save Tax on Sale of Commercial Property?
As mentioned under the Income Tax Act, 1961 (hereinafter called the Act), on sale of a commercial property, the capital gain earned on the same can be saved in the following ways-
5.1 Section 54F
In case the entire sale proceeds (and not only the capital gain) from the sale of commercial property is invested into a new residential house, then one is completely exempted from payment of any tax on such capital gain.
Time limit for making the investment is:
- 1 year prior to the date of sale, or
- 2 years after the date of sale, or
- 3 years after the date of sale in case of construction of house property.
Tax implications if only a part of the entire sale proceeds is invested in the new residential house property can be understood with the help of an example as follows-
Mr X purchased a commercial property in 2010-11 for Rs. 10 Lakhs and in the year 2022-2023 it is sold for Rs. 25 Lakhs.
| Particulars | Amount (Rs.) |
| Sale Proceeds [A] | 25,00,000 |
| Less: Indexed Cost of Acquisition (10,00,000*348/167) | 20,80,000 (approx.) |
| Long Term Capital Gains [C] = [A] – [B] | 4,20,000 |
| New House Property Purchase Price [D] | 15,00,000 |
| Exemption u/s 54F (Cost of New House*Capital Gain/Sale Proceeds) (15,00,000*4,20,000/25,00,000) [E] = [D]*[C]/[A] | 2,52,000 |
| Taxable Capital Gain (4,20,000 – 2,52,000) [C] – [E] | 1,68,000 |
| Tax Rate | 20% |
Amendment: Vide the Finance Bill, 2023, the limit on the maximum deduction that can be claimed by the assessee under Section 54 and 54F of the Act is Rs. 10 crores, applicable from the previous year 2023-24. It has been provided that if the cost of the new residential property purchased is more than Rs. 10 crores, then the cost of such asset shall be deemed to be Rs. 10 crores.
Note: Exemption under section 54F is not available if –
- one owns more than 1 residential property on the date of sale of commercial property, or
- another residential house property is purchased within a period of 1 year or in case of construction of residential house property within a period of 3 years from the date of transfer of commercial property.
5.2 Capital Gain Account Scheme
In case where the assessee, before filing the income tax return is unable to purchase a residential house property or construct a house property, then the unutilised amount shall be invested or deposited in a separate bank account called Capital Gain Account Scheme, and the same can be utilised further for purchase or construction of the house property within a period of 2 or 3 years respectively, to avail the exemption.
If the said amount is not utilised for purchase of house property within the stipulated time period, then the exemption availed shall be withdrawn and the unutilised amount shall be treated as capital gain in the previous year in which the period aforementioned expires.
Amendment: Vide the Finance Bill, 2023, for the purpose of deposit in the Capital gain Account Scheme, the investment is restricted up to Rs. 10 crores
5.3 Section 54EC
In case the entire or part of long-term capital gains (and not the sale proceeds) from the sale of commercial property are invested in specified bonds given below, within a period of 6 months from the date of sale of the commercial property and also before filing of the income tax return for the respective period in which such transfer has been made, the assessee is exempted from payment of tax on such capital gain. However, the exemption under Section 54EC is restricted to a maximum investment of Rs. 50 lakhs.
List of Specified bonds u/s 54EC:
- Rural Electrification bond (REC)
- Indian Railway Finance Corporation (IRFC)
- Power Finance Corporation Ltd (PFC)
- National Highways Authority of India (NHAI)
One must stay invested in such bonds for a period of 5 years. In case the amount is withdrawn before 5 years, then the exemption that was availed shall be withdrawn and taxed in the year of such withdrawal.
An assessee may invest the part of sale proceeds of commercial property in a Residential House Property as well as invest the remaining balance portion of capital gain in bonds as mentioned under Section 54EC and avail the exemption and escape from paying any capital gain tax.
6. Conclusion
Real Estate is surrounded by numerous income tax provisions starting from purchase of property, maintenance of the same, till the point it is sold. Thus, it is very important for an assessee to understand taxation on real estate transactions as it would help him/ her do the necessary tax planning and accordingly, save taxes. Section 54F is one of the schemes that could incredibly benefit an assessee if adequately used. However, violation of any of the rules and regulations as mentioned in the provisions of the said section to avail the benefits will land one in a problematic situation. Thus, understanding all the aspects of Section 54F of the Act before opting for is very crucial.
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