1. Definition of Capital Gains
Capital gains tax is levied on the profit earned from the sale of a capital asset, such as industrial land. The gain is calculated as:
Capital Gain = Sale Consideration – (Indexed Cost of Acquisition + Improvement + Transfer Expenses)
It is categorized into two types based on the holding period of the land before sale.
2. Short-Term Capital Gains (STCG)
If the industrial land is held for less than 24 months before the date of sale, the profit is considered a short-term capital gain. Key features include:
- Taxed at the applicable income tax slab rate of the seller (individual, firm, or company)
- No benefit of indexation allowed
- Subject to TDS (Tax Deducted at Source) in certain high-value transactions
This applies mainly to land flipped or sold shortly after purchase.
3. Long-Term Capital Gains (LTCG)
If the land is held for more than 24 months, the gain is treated as a long-term capital gain. In this case:
- Tax is levied at a flat rate of 20% (plus surcharge and cess, as applicable)
- Seller is eligible for indexation benefit, which adjusts the purchase price based on inflation using the Cost Inflation Index (CII)
- Allows for certain exemptions under Sections 54F, 54EC, etc., if conditions are met
LTCG is the more common scenario in large industrial land holdings or inherited properties.
4. Exemptions Under the Income Tax Act
Sellers of industrial land can reduce or eliminate LTCG liability by reinvesting the gains in specific ways, such as:
- Section 54EC: Investment in capital gains bonds issued by NHAI or REC within 6 months of sale, up to ₹50 lakh
- Section 54F: Reinvestment in residential property (with conditions)
- Section 115F: Applicable to certain non-resident Indians under specific conditions
These exemptions are subject to strict timelines and usage conditions.
5. TDS and Reporting Requirements
For high-value property transactions:
- TDS at 1% is applicable under Section 194-IA if the sale consideration exceeds ₹50 lakh (for residents)
- Higher rates (10% or more) apply for non-resident sellers, under Section 195
- Capital gains must be reported in the Income Tax Return (ITR) under the applicable head of income
Buyers and sellers must ensure accurate documentation to avoid scrutiny or penalties.
6. Impact on Partnerships, Companies, and Trusts
For entities like partnership firms or companies, capital gains from land sales are also taxable under:
- Section 45 of the Income Tax Act
- Gains are included in business income or capital account, depending on asset classification
- Tax treatment may differ if the land is held as stock-in-trade rather than capital asset
Entity type influences rate applicability, exemptions, and accounting treatment.
