Selling property can feel rewarding, but it also comes with the responsibility of handling taxes. The long-term capital gain tax on property can reduce your net earnings if you do not plan wisely. Thankfully, the Income Tax Act offers several exemptions and schemes that can help you reduce or even avoid paying this tax. With the right approach, you can safeguard your money and redirect it into future wealth-building opportunities.
What is Long-Term Capital Gain on Property?
When you sell an asset such as land, a house, or a building for more than its purchase price, the profit is called a capital gain. If the asset has been held for more than 24 months, the profit qualifies as a long-term capital gain. These gains are taxed at 20% with indexation benefit, plus applicable cess and surcharge.
For example, selling a home purchased years ago can bring substantial gains, but without careful planning, a large portion could go to taxes instead of your savings.
Exemption under Section 54: Reinvest in Another Residential Property
Section 54 is one of the most widely used provisions for saving tax on the sale of a residential property. If you reinvest the capital gains into another residential house in India, you can claim an exemption.
Key points:
• The new house must be purchased one year before or within two years of selling the old house.
• If you are constructing a new house, the construction must be completed within three years.
• You can claim an exemption up to the actual capital gain or the cost of the new property, whichever is lower.
If the gain is up to ₹2 crore, you may also claim exemption on the purchase of two houses once in a lifetime.
Exemption under Section 54F: Sale of Assets Other Than Residential Property
If you sell an asset like land, shares, or jewellery and reinvest the sale proceeds in a residential house, you can claim an exemption under Section 54F.
• The exemption applies to the proportion of sale proceeds used for buying or constructing a new house.
• The new property must be purchased one year before or two years after the sale, or constructed within three years.
• The taxpayer should not own more than one residential house at the time of investment.
This section is particularly useful if your gains come from assets other than houses, but you wish to convert them into a home.
Exemption under Section 54EC: Invest in Specified Bonds
Section 54EC offers another route to save tax. Instead of investing in property, you can invest the capital gains in government-notified bonds, such as those issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC).
• Investment must be made within six months of the property sale.
• The maximum amount you can invest is ₹50 lakh.
• The bonds have a lock-in period of five years.
Though these bonds offer relatively modest interest, they provide a safe and guaranteed way to save tax while keeping your money secure.
Capital Gain Account Scheme (CGAS): An Interim Solution
Sometimes, you may not be able to reinvest your gains before the deadline for filing your Income Tax Return. In such cases, you can deposit the amount in a Capital Gain Account Scheme (CGAS).
• The deposit must be made in a public sector bank before the due date for filing ITR.
• The funds can later be withdrawn to purchase or construct a house within the specified time frame.
• If not used within the allowed period, the earlier exemption will be withdrawn, and the amount will be taxed.
This is a smart option when you need more time to finalise your investment decision.
The Role of a Savings Plan in Tax Planning
While exemptions under Sections 54, 54EC, and 54F directly address long-term capital gain tax, aligning them with a broader savings plan makes your financial strategy stronger. A well-designed savings plan can help you use the exempted amount for building long-term security, funding children’s education, or ensuring a comfortable retirement.
For instance, by investing the exempted gains into structured insurance-linked savings, you could have reduced taxable income by ₹1.5 lakh annually under Section 80C. Over the years, this not only saves tax but also builds wealth while offering life cover.
Things to Keep in Mind Before Planning
1. Exemptions are allowed only if the new property or bonds are in India.
2. Selling the reinvested property within three years can reverse the exemption.
3. The maximum exemption under Sections 54 and 54F is capped at ₹10 crore.
4. Documentary evidence, like purchase deeds and bond certificates, must be preserved carefully.
Conclusion
Capital gains tax can feel like a burden, but with careful planning, you can save a significant portion and redirect it into wealth creation. Options like buying a new house, investing in Section 54EC bonds, or parking funds in the CGAS scheme provide flexibility for different needs. Pairing these exemptions with a disciplined savings plan ensures your money not only avoids tax outflow but also grows to secure your financial future.
Aviva India offers insurance-led financial solutions that integrate protection with long-term growth. With the right blend of planning and disciplined investment, you can transform your long-term capital gain into lasting security for yourself and your family.