Capital gains on land and building sold below stamp value, with exemptions, and forfeited advance

Assumptions

1. Mr. Ramesh is a resident individual; the land and the building on it form one residential house property whose income is taxed under the head Income from house property (section 82(1)(a)).
2. The deposit of ₹5 lakh in the capital gains account scheme is for building a residential house, is made in a specified bank or institution under the scheme notified by the Central Government (section 82(2)(a)), and is made before he files the return and not later than its due date, with the proof of deposit submitted with the return (section 82(2)(b)-(c)); the Bengaluru property is a residential house in India. If the building is to go up on the Bengaluru property, the purchase price and the deposit are both the cost of one new house (section 82(3)); if it is a second house, the two are exempt together only because the gain does not exceed ₹2 crore and Mr. Ramesh opts for two houses, an option he can use only once (section 82(5)-(6)).
3. The cost inflation index figures are the paper's own figures for the years as moved.
4. Mr. Ramesh's other income exceeds the basic exemption limit, so the long-term capital gain is not reduced by any unused part of that limit (section 197(2)).

Full value of consideration (section 78)

The stamp duty value (₹75 lakh) is higher than the agreed price (₹70 lakh), but it does not exceed 110% of the price (₹77 lakh), so the agreed price of ₹70,00,000 is taken as the full value of consideration (section 78(1)(b)).

Computation of capital gains for tax year 2026-27

The property was sold on 10 March 2027, after 23 July 2024, so the gain is computed without indexation (section 72(1)). Both the land (held since 2011-12) and the building (since 2014-15) were held for more than 24 months: long-term.

Exemptions

Conditions that keep the exemptions

• The new house (section 82(1)). The exemption is for one residential house in India purchased within one year before or two years after the date of transfer, or constructed within three years after that date (section 82(1)(b)). The Bengaluru house, bought on 28/03/2027, is within two years after the transfer on 10/03/2027. If the new house is transferred within three years of its purchase or construction, its cost for computing that gain is nil where the capital gain exceeded the cost of the new house, or is reduced by the capital gain where the gain did not exceed it (section 82(1)(i)-(ii)). Here the gain (₹54,30,000) exceeds the cost of the new asset (₹30,00,000, the purchase price and the deposit, section 82(3)), so on such a transfer its cost would be taken as nil.
• The deposit (section 82). The ₹5,00,000 in the capital gains account scheme is deemed, together with the amount already spent, to be the cost of the new house from the start (section 82(3)), which is why it is exempt now. It must then be used to construct the house within three years after the transfer, that is, by 10 March 2030 (section 82(1)(b)). If it is not fully used by then, the part left unused is taxed under section 67 as income of the tax year in which the three-year period ends (tax year 2029-30), and Mr. Ramesh may then withdraw it under the scheme (section 82(4)).
• The ₹10 crore limits (section 82(7)-(8)). Any cost of the new asset above ₹10 crore is ignored for section 82(1), and any capital gain above ₹10 crore is ignored for the deposit under section 82(2). Neither limit is reached here.
• The NHAI bonds (section 85). They qualify because they are bonds redeemable after five years, issued on or after 1 April 2018 by NHAI (section 85(6)), and the ₹3,00,000 is within the ₹50 lakh ceiling, which applies within a tax year and also to the year of transfer and the next tax year taken together (section 85(2)). The bonds must be held for five years: if they are transferred or converted into money within five years of their acquisition on 25 May 2027, the ₹3,00,000 not charged is deemed long-term capital gain of the tax year of that transfer or conversion, and a loan or advance taken on their security counts as such a conversion (section 85(3)-(4)). The ₹3,00,000 taken into account for this exemption cannot also be claimed as a deduction under section 123 in any tax year (section 85(5)).

Income chargeable under the head Capital Gains

Long-term capital gain ₹54,30,000 − exemptions ₹33,00,000 = ₹21,30,000.

Tax on the gain (section 197)

The tax is 12.5% of ₹21,30,000 = ₹2,66,250 (section 197(1)). But the property was acquired before 23 July 2024 and Mr. Ramesh is a resident individual, so the tax is limited to 20% of the gain computed with indexation (section 197(3)):

The excess of ₹2,66,250 over ₹28,840 is ignored, so the tax on the gain is ₹28,840 (before cess).

Treatment of the advance forfeited

The ₹5,00,000 advance received from Mr. Aman in July 2026 and forfeited when the deal fell through is taxed as income from other sources in tax year 2026-27 (section 92(2)(h)), the negotiations not having led to a transfer. As it is taxed, it is not deducted from the cost of the property (section 81(b)).

What changed from the Income-tax Act, 1961

As set (assessment year 2024-25, given separately), the sale on 10 March 2024 was before 23 July 2024, so the gain was computed with indexation and taxed at 20%: chargeable long-term capital gain ₹1,44,202.