Selling Land Bought in 2005? Tax Rules for Buying Shop or Gifting Proceeds
Many people face confusion when selling land purchased years ago. A common question arises: if you sell land bought in 2005 and use the money to buy a shop, do you still need to pay long-term capital gains tax? Another option people consider is gifting the proceeds to a family member for buying a house. Let's break down the tax implications clearly.
Tax on Land Sale Proceeds Used for Commercial Shop
If your father sells the land and uses the proceeds to purchase a commercial shop, he will not get any exemption from long-term capital gains tax. The Income Tax Act provides specific exemptions only for certain types of reinvestments. Buying a commercial property like a shop does not qualify under these rules.
Long-term capital gains from the sale of land are taxable unless the money is reinvested in a residential house or in specified capital gains bonds. The exemption under section 54F of the Income Tax Act applies solely when the sale proceeds are used to buy or construct a new residential property. This means commercial investments like shops are outside the scope of this tax benefit.
Gifting Proceeds for House Purchase: Does It Work?
Another idea might be for your father to gift the sale proceeds to you so you can buy a house. However, this approach will not provide tax exemption either. The reason is simple: the capital gains accrue to your father, not to you. For the exemption to apply, your father must be the one acquiring the residential house directly.
Section 54F requires the assessee—in this case, your father—to purchase or construct the new residential house using the sale proceeds. Gifting the money to another person, even a close family member, breaks this direct link. Therefore, the tax benefit is lost.
Alternative Strategy: Joint Property Purchase
If your father does not own more than one residential house on the date of selling the land, there is a practical alternative. He can consider purchasing a residential property jointly in both his name and yours. This arrangement is viewed as your father acquiring the house, with you being a joint holder for convenience.
After three years, your father can gift the property to you, or he can bequeath it to you through his will. This method allows him to claim the exemption under section 54F while ensuring the asset eventually transfers to you.
When Residential Reinvestment Isn't an Option
Suppose your father already owns more than one residential property. In that case, reinvesting in another house won't yield an exemption. However, he still has another route to reduce his tax liability. He can invest the capital gains in specific capital gains bonds under section 54EC.
These bonds must be purchased within six months from the date of selling the land. This investment can exempt up to ₹50 lakh of the capital gains from tax. It's a useful option when buying a residential house isn't feasible or doesn't provide a tax break.
Calculating the Tax on Capital Gains
Assuming your father is a resident of India and bought the land before 23 July 2024, he has two choices for calculating the tax. He can pay tax at a rate of 20% on the gains after adjusting for inflation through indexation. Alternatively, he can opt for a 12.5% tax rate on the gains without using indexation.
Both options include applicable surcharge and education cess. The decision depends on which method results in a lower tax outgo, based on the specific numbers involved.
Understanding these rules helps in making informed decisions about property sales and reinvestments. Always consult a chartered accountant for personalized advice tailored to your financial situation.
