Commercial property is the most sought-after real estate investment owing to the benefits like high capital appreciation and ever-increasing demand. With India’s present tax regime, a significant share of the capital gains through the commercial property is devoured by the tax.
Availing of the Income-tax exemptions under various sections of the Income-tax Act reduces the payable tax considerably. It hence helps you maximize your returns. If you are hunting for such tactics, you have fallen at the right place.
But first, what is Capital Gains Tax?
Any profit derived from the sale of a capital asset or in this case a commercial property is referred to as a capital gain. And capital gains are of two types: Short term capital gains and Long term capital Gains. However, this profit earned falls under the category of income. As a result, a tax must be paid on the income earned. The tax is known as capital gains tax, and it can be either long-term or short-term. The tax on long-term and short-term gains from the sale of the commercial property begins at 20% and 15%, respectively. Understanding the differential between long and short-term capital gains is important since both of these profits are taxed separately. The tax advantages and tax rates associated with the reinvestment of these two types of capital gains vary. Understanding the differential between long and short-term capital gains is important since both of these profits are taxed separately. The tax advantages and tax rates associated with the reinvestment of these two types of capital gains vary.
Now, How Can You Save Capital Gain Tax on Your Commercial Property Sale?
- Purchase of Residential Property – Income Tax Exemption under Section 54F
As per section 54F of the income tax act, if you sell a commercial property and buy another residential property, then you are eligible for an exemption under certain specified conditions stated below.
- The person must be an individual or HUF, i.e., Hindu Undivided Family.
- The exemption is given to an individual only when the commercial property sold is classified as a long-term asset; i.e., it must be held by the individual for more than two years.
- The person must invest in the purchase of one residential property in India within one year before or two years after the date of transfer.
- The amount must be used within three years for the construction of a residential property if any.
- The person shall not sell the new house property within three years from the date of purchase or construction. Any violation shall redeem the taxes exempted before in the very same year of the transaction.
- Non-availability of Exemption under Section 54F of the Income Tax Act
The tax exemption under section 54F is not available under the following circumstances.
- If the person holds more than one residential property on the date of transfer of long-term capital assets.
- If the person purchases the additional residential property, i.e., apart from the property purchased using the gains, within a year from the date of transfer of long-term capital asset.
- If the person constructs another residential house apart from the house been built by the gains, within three years from the date of transfer of long term capital asset.
- Conditions under which Tax Exemption under 54F is withdrawn
Suppose the person transfers the newly purchased residential property or constructed property within three years from the date of transfer of the capital asset. In that case, the capital gains exempted earlier under section 54F shall be considered income and taxed.
- Capital Gains Account Scheme under 54F
If the person does not invest in any of the property till the last date of filing of Income Tax Returns, then the person may deposit the capital gains in Capital Gains Account. The person may utilize the deposited money to purchase a residential property or construct a property within three years. If not done so, the unutilized capital gains deposited in the account shall be treated as income and will be taxed.
- Purchase of Government bonds – Tax Exemption under Section 54EC
As per section 54EC of the Income Tax Act, if you sell the commercial property, the capital gains can be exempted from being taxed under the specific conditions stated below.
- All categories of assessments like NRI, HUF, Company, Firm, etcetera are eligible for tax exemption under section 54EC.
- The exemption is available to the capital gains from long-term capital, land or building, or both.
- The capital gains must be invested wholly or partially in the long-term specified assets, i.e., bonds issued by the government.
- The amount must be invested in the long-term specified assets within six months from the transfer date.
- Investment through capital gains cannot exceed Rs.50,00,000.
The following are the bonds recognized by the government for the tax exemption under section 54EC.
- National Highway Authority of India.
- Rural Electrification Corporation Limited.
- Any other bonds as notepad in the official gazette.
Note that the bonds should be redeemable after five years.
- Conditions under which Tax Exemption under 54EC is withdrawn
If the specified long-term asset is transferred or converted before the maturity period, i.e., five years, the tax exemption shall be withdrawn. Further, it would be considered income and taxed in the subsequent year of transfer or conversion.
It is a point to note that if the person takes any loan on the long-term specified asset, the date of such transaction shall be considered as the transfer of the investment, and the tax exemption shall be withdrawn.
- Purchase of Industrial Undertaking – Tax Exemption under section 54D
The eligibility criteria for availing of the tax exemption under section 54D is
- There must be a capital gain from the property, maybe land or building, that must have been used for industrial purposes.
- The capital gains from such property must be re-invested to acquire new land or build for shifting goals or re-establish the industrial undertaking.
The tax exemption under section 54D can be availed if the following criteria are met.
- The tax is exempted to all the categories of assessees, i.e., individual or HUF, on acquiring land or building, which is a part of the industrial undertaking.
- The exemption is allowed to both Long term capital assets and short-term capital assets.
- The transferred asset must have been used for industrial purposes for at least two years before the acquisition date.
- The person must invest in purchasing new land or building for shifting purposes within three years from the date of acquired compensation.
If you fulfill all the above conditions, you would be eligible for tax exemption for an equal amount to the amount invested.
- Conditions under which Tax Exemption under 54D are withdrawn
Under any circumstances, if the new land or building acquired through the capital gains is transferred before the period of three years, then the tax exemption will be withdrawn.
- Capital Gains Account Scheme for Section 54D
Another way to reduce capital gains tax on property sales is to invest in a Capital Gains Account Scheme (CGAS). The Capital Gains Account Scheme is applicable under section 54D also. This strategy is ideal for those who are unable to invest in a brand-new house before completing their income tax returns, and it gives significant assistance to taxpayers. You can invest in this CGAS programme for three years and use the capital gains to buy or build a residential residence on your land during that time. You can deposit the amount in the account and use it for acquiring new land or building for industrial undertaking within three years. If the deposited amount remains unutilized after the specified period, the capital gains shall be considered income, and the tax exemption remains null and void. The deposit in this CGAS account must be made prior to filing or registering an income tax return, and the investment in the Capital Gain Account Scheme (CGAS) must subsequently be indicated in the income tax return.
- Deduct all Capital Losses
This is, once again, the best approach to reduce tax on capital gains on the sale of your home. It allows you to offset all capital gains or earnings against previous capital losses. It is equivalent to the same-year adjustment for capital losses and profits. However, the capital loss must be from a previous date, and short-term capital losses can only be offset against short-term capital profits. Similarly, long-term capital losses can only be taken off against long-term capital profits, with the proviso that all capital losses must be carried forward for 8 years. Aside from that, in order to carry over all of your capital loss, your income tax return must be submitted before the income tax return filing deadline.
To summarize, the re-investment under section 54F, i.e., the residential property, requires three years of locking. It can be a steady passive income source, and the residential property investment provides a sense of security.
The capital gains can be diverted to government bonds investment under section 54EC. Government bonds are the highest credible investment instruments that ensure profits and erase losses.
Income from the sale can be re-invested in an industrial undertaking for lucrative returns, capital appreciation, and the added advantage of tax exemption.
Re-investing in a property through capital gains may seem not much rewarding as the earnings are physically transferred to an asset. It creates a sense of diversion of the funds rather than rejoicing the profits. But every cloud has a silver lining; that asset can appreciate with time and increase your returns in the future. Therefore, the investor must plan for re-investing to maximize his returns both by saving the capital gains from being taxed and through capital appreciation.
After going through the lucrative tax exemptions by the Indian government under various sections, I am sure you would want to invest in a commercial property. Assetmonk is an online platform that helps you bag the best deals in the market. The curated assets, after undergoing thorough due diligence, make it to our list. You can diversify your risk by investing in our products like Growth, Growth Plus, and Yield, under fractional ownership.
Capital Gain Tax on Commercial Property Sale FAQ's:
The capital gains can be exempted from levying tax under sections 54F, 54EC, and 54C of the Income Tax Act. But all the exemption schemes require the investor to divert the capital gains into another asset and lock it for some time.
The capital gains must be diverted to invest in residential property, and no transactions should be performed like selling or transferring the property purchased or constructed.
You can invest the capital gains in the long term specified assets, i.e., government bonds, for a lock-in period of five years before which you cannot perform any transactions on the asset.
Under section 54D of the Income Tax Act, you can invest the capital gains through the sale of industrial undertaking property for the same purpose. You may again invest in the land or building, but for the industrial purpose only. The amount exempted is equal to the investment made in industrial undertaking property.