My father wants to sell some land that he bought in 2005. If he uses the proceeds to buy a shop, does he still need to pay long-term capital gains (LTCG) tax? In another option, can he send me the proceeds as a gift so that I can buy a house?
-Name withheld on request
Long-term capital gains on the sale of land would be taxable unless reinvested in a residential house or capital gains bonds. No exemption is available if the sale proceeds are used to purchase a commercial shop. Exemption under section 54F is available only if the sale proceeds from the sale of the long-term capital asset are reinvested in a residential property. Further, the exemption is available only if he owns not more than one residential house on the date of sale of the land.
Section 54F requires the assessee to purchase or construct a new residential house from the proceeds from sale of land. Therefore, if your father gifts the proceeds to you and you buy a residential house, the exemption would not be available since the capital gains accrue to him and he is not acquiring the residential house.
In case your father does not own more than one residential house on the date of sale of the land, one alternative option that could be considered is the purchase of the residential property jointly in the names of your father and you. This would be considered as the acquisition of a residential house by your father, since you would be a joint holder only for convenience. The property could then be either bequeathed to you by your father in his will, or gifted to you after 3 years.
In case reinvestment in a residential property does not result in any exemption (assuming that your father already owns more than one residential property), the capital gains on the sale of the land may still be exempt up to ₹50 lakh if reinvested in specific capital gains bonds under section 54EC within six months from the date of sale of the land.
Assuming your father is a resident, since the land was acquired prior to 23 July 2024, your father would have the option to pay capital gains tax at the rate of 20% (plus applicable surcharge and education cess) on the gains computed considering the indexed cost of acquisition, or at the rate of 12.5% (plus applicable surcharge and education cess) on gains computed without considering the benefit of indexation of the cost of acquisition.
Mahesh Nayak, chartered accountant, CNK & Associates.
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