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June 8, 2023

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‍ITR 2 - Capital Gain Tax on Sale of Land & Building

ITR-2 Capital Gains Tax on Sale of Land and Building

There are important compliance aspects involved in selling a plot of land, a residence, or a commercial property in respect to tax filing. Calculation of whether the gain you have made is either a short term gain or long term gain, deduction of costs, applying section 50C stamp duty deductions, and putting the calculations in your income tax return requires proper calculation.

It is imperative that you understand how to calculate ITR-2 capital gains on the sale of land and building so as to make sure that your tax return calculations are accurate. Capital gains from immovable property have to be separately calculated in Schedule CG of form ITR-2.

Who Reports Property Sales in ITR-2?

Form ITR-2 caters to Individuals/Hindu Undivided Families having income from salary, income from house property, capital gains, etc., but without any income from business or profession. In case you have sold off any land or building in the financial year for being a non-business entity, Form ITR-2 is the one you have to fill.

However, if you sell any lands/buildings as a real estate businessperson/dealer, then such properties come under the head of Business Stock-in-Trade and the tax will be levied on income from business/profession and hence Form ITR-3/ITR-4 should be filled.

Suggested Read: ITR 3 VS ITR 4

The 24-month rule for determining long-term gains

It all depends on the holding period: time that elapses from the date of acquisition to the date of transfer of property.

In case of land or buildings, 24 months is the period in question:

Short-term capital gain (STCG): This is when an individual has possessed the investment for less than 24 months.
Long-term capital gain (LTCG): This is when the investment is possessed for more than 24 months.

Buying a plot of land on 10th May 2022 and selling it on 20th June 2025 means that it will possess 37 months of holding since it is above 24 months; thus, it will be a long-term capital gain. However, if the land was sold on 15th April 2024, it will be a short-term gain.

Computation of Capital Gains on Property

Schedule CG involves a systematic computation process:

Full Value of Consideration: The price at which the property is sold or its value as per Section 50C.
Minus Transfer Expenses: Direct expenses such as legal fees and brokerage charges.
Net Value of Consideration: Total value of consideration less transfer expense
Minus Cost of Acquisition: Original cost of purchasing the property.
Minus Cost of Improvement: Capital expenses made for improvements.
Gross Capital Gains: Net value of consideration less cost of acquisition and improvement.
Minus Reinvestments: Claim under sections 54, 54EC, or 54F.
Net Capital Gains: Computation amount carried forward to income computation.

Suggested Read: Capital Gains Tax on Shares, Land & Buildings

Effect of Section 50C on Sale Value

Section 50C avoids any undervaluation of property deals. Here, your selling value is compared with the Stamp Duty Value (SDV) set through the state authority circle rates. In case the stamp

duty value is higher than your declared sale value, the stamp duty value is taken as the total value of consideration to work out capital gains.

There is a safe harbor provision that if the stamp duty value does not exceed 110% of your actual selling value, then your declared actual sale value is taken into account.

In case you sell a building at ₹50 Lakh while the circle rate value comes out to be ₹53 Lakh, the SDV will be 106% of your value. As it is within the limit of 110%, your consideration stays ₹50 Lakh. But in case the SDV becomes ₹58 Lakh (116%), the Schedule CG takes the figure of ₹58 Lakh as your sale consideration.

Allowable Deductions for Property Sellers

Eligible deductions help calculate the true net gain:

Purchase Price of the Property: The initial cost incurred for purchasing the property, including the registration charges.
Improvement Cost: The expenditure incurred in making changes to the property structure, such as addition of a floor or boundary wall. However, repairs and painting are not allowed.
Costs of Transfer: Costs associated with transferring the property during the process of selling the property.

Also Check Out: Key Provisions of Income Tax Law

LTCG Post 23 July 2024 Rules

In case of transfer on or after 23 July 2024:

LTCG Rate will be 12.5%.
The benefits of standard indexation (indexation of the cost of acquisition by means of Cost Inflation Index) have been stripped off from the base system.

For resident persons and HUFs who have acquired the asset prior to 23 July 2024 and disposed of the same on or after that date, there will be a provision for grandfathering. These taxpayers may consider the two options below and pick up whichever is more economical:

Option 1: 12.5% without indexation
Option 2: 20% with indexation

A taxpayer who is eligible for the benefit of grandfathering is permitted to opt for the more economical computation procedure as per ITR-2 Schedule CG. However, for non-resident taxpayers or assets acquired on or after 23 July 2024, only 12.5% rate without indexation applies.

Filing of Property Transactions in ITR-2 Schedule CG

Schedule CG necessitates filling out information for every land/building separately. In case there are two property transactions in one financial year, two separate property schedules need to be opened.

Inputs needed in Schedule CG are as follows:

Details of buyer (Name, PAN/Adhaar, percentage of ownership, and address).
Date of acquisition and date of transfer.
Sale price and Stamp Valuation Authority value.
Section 50C valuation chosen.
Acquisition cost, Improvement cost, and Transfer cost details.
Reinvestment deductions.

Reinvestment Exemptions

The taxpayers can reduce or even avoid the LTCG through the use of statutory exemptions:

Section 54: Reinvest the gains from selling the residential house into buying or building another residential house in India.
Section 54EC: Reinvest the gains amounting up to ₹50 Lakh into 5-year redeemable bonds like NHAI or REC within 6 months of the sale of asset.
Section 54F: Reinvest the proceeds from the sale of other assets than the residential house (e.g., land or commercial property) into buying or constructing a residential house.

Documents Required for Records

Here are some documents that should be kept for proof purposes:

Register of purchases and sales of property.
Certificate/receipt from Stamp Valuation Authority.
Documents related to payments made for making structural improvements to the property.
Brokerage costs/transfer charges receipts.
Records of transfer transactions in bank accounts.
Receipts from investments in 54EC bonds/Capital Gains Account Scheme.

Conclusion

For the reporting of ITR-2 capital gain arising from sale of land and building, the following will be considered: determination of the holding period, application of section 50C, choosing the best formula for tax calculations, and filling of each individual property in Schedule CG.

FAQs

1. Is the sale of land/building included in ITR-2?

Yes. An individual/HUF without any business income needs to report capital gains on property in Form ITR-2 Schedule CG.

2. How do you calculate capital gains on sale of property?

Full value of consideration (or Sec 50C stamp value) minus transfer expenses, cost of acquisition, and improvement cost.

3. What is the meaning of the 24-month holding period?

The property held for a period of more than 24 months results in long-term capital gains whereas property held for 24 months or less gives rise to short-term capital gains.

4. What is Section 50C?

In case of circle rate value exceeding 110% of the sale consideration declared by you, Sec 50C substitutes the sale price with the stamp duty value.

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