When selling commercial property in India, one must be aware of the capital gains tax implications. Capital gains tax is levied on the profit earned from the sale of an asset, such as commercial property, and it can significantly impact your overall return on investment. However, there are legitimate strategies and provisions within the Indian tax system that can help you minimise or even avoid capital gains tax liability. This article aims to provide an overview of effective approaches for mitigating capital gains tax when selling commercial property in India.
Before delving into the strategies, it is essential to understand how capital gains tax works in India. The Income Tax Act of 1961 governs capital gains taxation in the country. When you sell a commercial property, the profit you make is classified as either short-term or long-term capital gains, depending on the holding period of the property.
1. Long-Term Capital Gains:
If the property is held for more than two years before the sale, it is categorised as a long-term capital asset. Long-term capital gains are taxed at a lower rate than short-term gains. As of the knowledge cutoff date of September 2021, the long-term capital gains tax rate is 20% with indexation benefits, which allows adjustment of the cost of acquisition for inflation.
2. Short-Term Capital Gains:
If the property is sold within two years of purchase, it is considered a short-term capital asset. Short-term capital gains are taxed at the individual’s applicable income tax slab rate.
a. Section 54:
Under this provision, if the capital gains are reinvested in purchasing another residential property within a specified timeframe, you can claim an exemption from capital gains tax. The new property must be purchased within one year before or two years after the sale of the commercial property, or it can be constructed within three years from the sale date. The amount of capital gains invested in the new property is eligible for exemption from tax.
b. Section 54EC:
This section allows you to invest the capital gains in specified government bonds, such as Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI) bonds, within six months from the date of sale. Investing in these bonds can provide a tax exemption for the amount invested, up to a certain limit.
If you have incurred capital losses from the sale of other assets, such as stocks or mutual funds, you can set off these losses against the capital gains from the sale of your commercial property. By utilizing this provision, you can reduce your overall tax liability.
When calculating long-term capital gains tax, you can adjust the cost of acquisition for inflation using the Cost Inflation Index (CII) provided by the government. This helps in reducing the taxable capital gains by accounting for the impact of inflation over the holding period.
Another strategy to avoid capital gains tax is by transferring the commercial property through a gift deed or family settlement deed. However, it is crucial to consult with a tax professional before pursuing this approach, as there may be legal and tax implications involved.
In a Joint Development Agreement, the landowner enters into an agreement with a developer to construct a commercial property. Instead of selling the land outright, the landowner receives a share in the constructed property. This method may result in a reduced capital gains tax liability.
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