Income tax: Is exemption from capital gains available for investment in a plot of land or commercial property?

Can the capital gains from the plot of a land sale be re-invested to purchase a plot of land or commercial property for tax exemption?

Exemption from capital gains on the sale of any asset can be claimed only if the asset sold is a long-term capital asset. The period prescribed for this purpose is different for different assets. Land and buildings become long-term assets if held for more than twenty-four months.

Long-term capital gains arising on the sale of land can be saved by an Individual or a HUF under Section 54F by investing the net sale proceeds in buying a residential house within the prescribed time limit, subject to the condition that the taxpayer does not own more than one residential house on the date of sale of the land.

Alternatively, any taxpayer can avail of an exemption on long-term capital gains arising on the sale of land or buildings by investing the indexed capital gains in capital gains bonds of specified financial institutions like REC, PFC, NHAI, and PFC. This exemption can be claimed up to ₹50 lakh in a year and in respect of all the transactions of long-term capital gains for the year.

There is no provision under the income tax laws providing for exemption from long-term capital gains arising on the sale of a plot by reinvesting in a commercial property or a pure plot of land. You can claim an exemption under Section 54F for the purchase of a plot of land for the construction of a residential house on the same, provided that the construction is completed within three years from the date of sale of the plot of land.

Balwant Jain is a tax and investment expert and can be reached at jainbalwant@gmail.com and on @jainbalwant on X.