How to save capital gain tax on sale of commercial property?

For capital gain exemption on sale of commercial property,  what Srivasu has mentioned about purchasing a residential property is totally correct. However, I would like to explain more about this. So, you can claim exemption from capital gain on sale of commercial property under 54F. But what is 54F and how to avoid capital gains tax on sale of commercial property in India? I will explain this in brief.

How to save tax on sale of commercial property under Section 54F?

You need to fulfil some requirements to claim tax exemption under Section 54F. Check out the criteria below:

• You can claim this tax exemption if you are an individual or belong to Hindu Undivided Family (HUF).

• You can only claim an exemption under 54F of a capital gain on long term capital assets by purchasing a residential house.

• The sale of assets must proceed in the following guideline:

• You must purchase the residential property one year before selling your commercial property.

• You need to purchase residential property within 2 years of selling the commercial property.

• You need to construct a residential property within 3 years of selling the commercial property. 

When can you not avail of tax exemption under  Section 54F?

• If the assessee has ownership of one or more residential properties during the time of the transfer process, he/he cannot apply for tax exemption under Section 54F.

• If the assessee constructs another residential property within one year of purchasing a house, he/she cannot claim for tax exemption under Section 54F.

That's all I wanted to say about capital gain exemption on sale of commercial property. I hope you like it.

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Here are several methods for how to avoid capital gains tax on sale of commercial property in India to consider:

• If you reinvest the entire sale proceeds from the commercial property into purchasing a residential property, you can claim exemption under Section 54F. The new residential property must be purchased within one year before or two years after the sale, or constructed within three years.

• You can invest the capital gains (not the entire sale proceeds) in specified bonds issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months from the date of transfer. The maximum investment in such bonds is limited to Rs. 50 lakhs.

• If you are unable to invest in a new property before the due date for filing your income tax return, you can deposit the capital gains in a Capital Gains Account Scheme (CGAS). This gives you additional time to utilize the funds for purchasing or constructing a new property.

• If you have any capital losses (either short-term or long-term) from other investments, you can set off these losses against the capital gains from the sale of the commercial property to reduce your taxable capital gain.

• Non-Resident Indians (NRIs) can also take advantage of these provisions. Additionally, they should be aware of any Double Taxation Avoidance Agreement (DTAA) between India and their country of residence, which might offer additional tax relief.

• Ensure you have accounted for any costs associated with the acquisition, improvement, and sale of the property. These costs can be deducted from the sale proceeds to compute the net capital gains.

• Also, consider the indexation benefit for long-term capital assets, which adjusts the purchase price for inflation, thereby reducing the taxable amount.

Under Section 54G and Section 54GA, if the sale proceeds are reinvested in specified business assets in specified areas or Special Economic Zones, capital gains can be exempted. This is how to save capital gain tax on sale of commercial property.

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My father always used to say that one of the oldest and greatest ways to invest in order to create a steady stream of income and ensure financial stability is through real estate. And you may not have realised this but real estate investments are a long-standing custom in India that existed even before the creation of various financial products like mutual funds and equities. Investments in commercial real estate are often made for personal use or for rental purposes or for capital gains on sale of commercial property.

How to save capital gain tax on sale of industrial property?

One is totally excluded from paying any tax on such capital gain if the entire sale proceeds (and not only the capital gain) from the sale of commercial property are put into a new residential home.

According to the Finance Bill of 2023, the maximum deduction that an assessee may claim under Sections 54 and 54F of the Act will be limited to Rs. 10 crores, starting with the fiscal year 2023–2024. The cost of the asset will be judged to be Rs. 10 crores if the price of the newly purchased residential property is more than that amount. So, if you are wondering how to save capital gain on sale of commercial property, this is one of the best ways to do so.

The assessee is exempt from paying tax on such capital gains if all or a portion of the long-term capital gains (and not the sale proceeds) from the sale of commercial property are invested in designated bonds, such as National Highways Authority of India (NHAI), REC bonds, within six months of the date of the sale of the commercial property and also before filing the income tax return for the specific period in which such transfer has been made. However, only investments up to Rs. 50 lakhs are eligible for the exemption under Section 54EC. Now you know how to save capital gain tax on commercial property.

In the case of the commercial property capital gains tax, the earnings from renting out commercial buildings are subject to capital gains tax. Regardless of the amount, the long-term capital gains tax is a flat 20% if the property is owned for more than 24 months.

To explain the capital gain tax on commercial property further, I’d say that the profit on the sale of commercial real estate that is leased will be converted to capital gains. If the property is held for longer than 24 months, it will be considered long-term and subject to a 20 percent flat tax, regardless of the amount. You can choose between investing in a residential property under Section 54F or investing in capital gains bonds under Section 54EC to reduce your tax burden. If the property is sold earlier than 24 months, however, the proceeds are taxed as ordinary income and are considered short-term capital gains.

I hope this clarifies your query about the commercial property sale capital gains tax.

I have gone through the above-mentioned responses, about the sale of commercial property capital gain exemption, and I completely agree with the answers.

You must be aware of the fact that the seller's profit or gain from selling his capital asset will be referred to as capital gain. Keep in mind that the profit will be considered income and that the necessary tax must be paid on that specific amount in the same year the transaction occurred. The capital gain tax on the sale of the property is another name for this charge. Long-term and short-term capital gains are two subtypes of these gains. 

I‘d like to conclude here about the commercial property capital gains tax. I hope this helps:)

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My father has recently sold his shop, so he was explaining everything related to the capital gain on sale of commercial property to me. He told me that it is very important to understand taxation on real estate transactions as this will help me do the required tax planning and save the capital gains tax on the property sale.

He also told me that real estate is surrounded by several income tax provisions. Starting from the purchase of a property to the maintenance of the same to the point when you sell it. He also told me about Section 54F and Section 54EC of the Income Tax Act. These sections talk about the capital gain on commercial property. I will tell you about both of these sections in detail:

Section 54F of Income Tax Act:

Section 54F is meant for long-term capital gains (LTCG) from the sale of the commercial property. According to this section, one can save capital gains tax on the sale of commercial property using these provisions:

• You are required to invest the entire sale proceeds in a residential property. Unlike section 54 where you need to invest just the capital gain amount.

• If you do not invest the entire sale proceeds, then you’ll get an exemption on prorate basis. This calculation will be as followed:

Invested Amount*LTCG/Net consideration

You can follow the guidelines mentioned by Amit to purchase a residential property.

Points to keep in mind: Sale of Commercial Property Capital Gain

• If you want to save tax on capital gains arising out of the sale of any other property, then you need to purchase only residential property. This means you can’t purchase commercial property or land to save capital gains tax.

• You are allowed to hold only 1 more property other than the new residential property when claiming under this section.

• You can’t sell the newly bought residential property within the first 3 years after purchase.

Section 54EC of Income Tax Act:

Another way to save capital gain tax on the sale of the commercial property is to purchase mentioned capital gain bonds available under section 54EC, worth the transaction’s capital gain. Under this scheme, the notified bonds are of National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC). You can invest maximum Rs. 50,00,000 in these bonds in an F.Y. You are required to buy these bonds within 6 months of transfer of property.

Now you know how to save tax on sale of commercial property.

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This is all you need to know about the capital gain on sale of commercial property.

Seeking tax exemption on capital gains is rather easy. However, there are only a few people who know how to save capital gain tax on sale of commercial property. Thankfully, I’ve been in the industry for quite some time now and this has helped me to gain some insight into this query in particular. I will tell you two ways to get tax exemption, these are,

Section 54EC Deduction on Capital Gains Under Income Tax Act states allows a commercial property seller to buy government approved bonds. The bonds must be purchased within 6 months of the sale of the property and the bonds will be locked in for 5 years’ time. An individual cannot invest in the capital gains bonds for more than Rs. 50 lakhs. Some government approved capital gains bonds are:

• National Highway Authority of India Ltd

• Rural electrification Corporation Ltd

• Indian Railway Finance Corporation Ltd

• Power Finance Corporation Ltd

Another way to get exemption on capital gain tax on sale of commercial property is to buy a residential property. The seller of the property must buy a residential property and hold it for at least 3 years of its purchase.

These are the two ways I know that can answer you question ‘how to save capital gain tax on sale of commercial property in India.