Save Tax on Sale of Commercial Property

Indians always think of saving capital gain tax which is required to be paid on sale of commercial property. Capital Gain tax can be Long Term Capital Gain Tax or Short Term Capital Gain Tax. Land is a Capital Asset and and as an appreciated asset, a landowner can make huge capital gains on its sale. However, agricultural land in a rural area in India is not considered a Capital Asset. So, no capital gains are applicable on its sale.

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. Amit Mishra 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	25,00,000
Less: Indexed Cost of Acquisition (10,00,000*331/167)	20,00,000 (approx.)
Long Term Capital Gains	5,00,000
New House Property Purchase Price	15,00,000
Exemption u/s 54F (Cost of New House*Capital Gain/Sale Proceeds)(15,00,000*5,00,000/25,00,000)	3,00,000
Taxable Capital Gain (5,00,000 – 3,00,000)	2,00,000
Tax Rate	20%

Amendment: Vide the Finance Bill, 2023, it is proposed to impose a limit on the maximum deduction that can be claimed by the assessee under Section 54 and 54F of the Act to 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.

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.

Exemption under 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 like National Highways Authority of India (NHAI), REC bonds 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.

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.

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, it is proposed to restrict the investment up to Rs. 10 crores.

Note: There is no way to avoid capital gains tax on the sale of property in the case of a short-term capital gain. The entire capital benefit amount may be included in your income, and you will be taxed according to the income tax bracket you may be in. The provisions of Sections 54, 54EC, and 54F of the income tax only apply to the long-term capital gains tax on the sale of the property.