Income Tax Allowances and Deductions Allowed to Salaried Individuals

Salaried employees form the major chunk of the overall taxpayers in the country and the

contribution they make to the tax collection is quite significant. Income tax deductions offer a

gamut of opportunities for saving tax for the salaried class. With the help of these deductions and

exemptions and, one could reduce his/her tax substantially.

In this article, we try to list some of the major deductions and allowances, available to the

salaried persons, using which one can reduce their income tax liability.

Exemption of Allowances

House Rent Allowance

A salaried individual having a rented accommodation can get the benefit of HRA (House Rent

Allowance). This could be totally or partially exempted from income tax. However, if you aren’t

living in any rented accommodation and still continue to receive HRA, it will be taxable. If you

couldn’t submit rent receipts to your employer as proof to claim HRA, you can still claim the

exemption while filing your income tax return. So, please keep rent receipts and evidence of any

payment made towards rent.

You may claim the least of the following as HRA exemption.

a. Total HRA received from your employer 60000

b. Rent paid less 10% of (Basic salary +DA) 160000-120000=40000

c. 40% of salary (Basic salary+DA) for non-metros and 50% of salary (Basic salary+DA) for
metros 480000

Read more about how to claim HRA exemption.

Standard Deduction

The Indian Finance Minister, while presenting the Union Budget 2018, announced a standard

deduction amounting to Rs. 40,000 for salaried employees. This was in the place of the transport

allowance (Rs. 19,200) and medical reimbursement (Rs. 15,000). As a result, salaried people

could avail an additional income tax exemption of Rs. 5,800 in FY 2018-19.

The limit of Rs. 40,000 has been increased to Rs. 50,000 in the Interim Budget 2019.

Read more on Standard Deduction

Leave Travel Allowance (LTA)

The income tax law also provides for an LTA exemption to salaried employees, restricted to

travel expenses incurred during leaves by them. Please note that the exemption doesn’t include

costs incurred for the entire trip such as shopping, food expenses, entertainment and leisure

among others. You can claim LTA twice in a block of four years. In case an individual doesn’t

use this exemption within a block, he/she could carry the same to the next block. Below are the

restrictions which are applicable to LTA:

 LTA only covers domestic travel and not the cost of international travel

 The mode of such travel must be either railway, air travel, or public transport

Read more about how to claim LTA

Mobile reimbursement

A taxpayer may incur expenses on mobile and telephone used at residence. The income tax law
allows an employee to claim a tax free reimbursement of expenses incurred.

An employee can claim reimbursement of the actual bill amount paid or amount provided in the

salary package, whichever is lower.

Books and Periodicals

Employees incur expenses on books, newspapers, periodicals, journals and so on. The income

tax law allows an employee to claim a tax free reimbursement of the expenses incurred.

The reimbursement allowed to an employee is the lower of the bill amount or the amount

provided in the salary package.

Food coupons

Your employer may provide you with meal coupons such as sodexo. Such food coupons are

taxable as perquisite in the hands of the employee. However, such meal coupons are tax exempt
up to Rs 50 per meal.

A calculation based on 22 working days and 2 meals a day results in a monthly benefit of Rs

2,200 (22*100).

Consequently, the yearly exemption works up to Rs 26,400.

Relocation allowance

Businesses, these days operate in multiple locations across the country. There are possibilities

that you are asked to shift to a different city for business reasons. Such a relocation can cause

expenses such as shifting to a new house, moving furniture, car transportation cost, car

registration charges, getting your kids admitted to a new school, and more. Fortunately, these

expenses are to be borne by the employer. Sometimes, the employer makes a direct payment for

such expenses.

Here is a summary of the tax liability of these expenses:

 Car transportation cost: An employee may incur expenses on transportation of the car to

the new place. The employer may reimburse the transportation expenses to the employee

against actual bills submitted by the employee. For example, expenses may be incurred on

movers and packers. Such expenses whether reimbursed to the employee or directly paid

to the transporters are exempt from tax for the employee.

 Car registration charges: Most of the states within India charge car registration charges

for entry of the vehicle in their state. Certain conditions must be met for the car

registration charges to be exempt from taxes. That is, the car must be registered in the

name of the employee. The same car must be used to travel on transfer to be considered as
 part of packaging and transportation cost. Upon meeting the above conditions, any

expenses reimbursed by the employer to the employee are exempt from tax for the

employee.

 Packaging charges: The expenditure on the packaging and moving of the furniture,

irrespective of reimbursement or direct payment by the employer, are exempt from tax for

the employee.

 Accommodation: The employer may provide accommodation facilities for the initial 15

days once you relocate. Such expense will include boarding and lodging expenses

including any meals forming part of such expenses. The expenses reimbursed or met by

the employer will be exempt from tax for the employee.

 Train/air tickets: The travelling expenses for the employee and his family from the

current place of residence to the place of new employment are exempt from tax.

 Brokerage paid on rented house: If the employee has paid brokerage charges for finding

a house for rent, the expenses incurred are considered to be towards personal obligation of

the employee. The reimbursed if any received by an employer is taxable as salary income

of the employee.

 School admission fees: Though your employer reimburses the school admission fees for

your kids, this type of expense is considered to be a monetary benefit of the employee.

Therefore, the reimbursement is taxable as salary income of the employee. Any expenses

incurred beyond the period of 15 days will be taxable.

Children Allowances
The employer may provide you education allowance for your children as part of your salary.

Such allowance received by the employer towards children education is exempt from tax.

However, the employee can claim maximum Rs. 100 per month as exemption or Rs. 1200 per

annum. The exemption is allowed for a maximum of 2 children.

Allowable Deductions

Section 80C, 80CCC and 80CCD(1)

Section 80C is the most extensively used option for saving income tax. Here, an individual or a

HUF (Hindu Undivided Families) who invests or spends on stipulated tax-saving avenues can

claim deduction up to Rs. 1.5 lakh for tax deduction. The Indian government too supports a few

as the tax saving instruments (PPF, NPS etc.) to encourage individuals to save and invest

towards retirement. Expenditures/investment u/s 80C isn’t allowed as a deduction from income

arising due to capital gains. It means that if the income of an individual comprises of capital

gains alone, then Section 80C cannot be used for saving tax. Some of such investments are given
below which are eligible for an exemption under Section 80C, 80CCC and 80CCD(1) up to a

maximum of Rs 1.5 lakh.

 Life insurance premium

 Equity Linked Savings Scheme (ELSS)

 Employee Provident Fund (EPF)

 Annuity/ Pension Schemes

 Principal payment on home loans

 Tuition fees for children

 Contribution to PPF Account

 Sukanya Samriddhi Account

 NSC (National Saving Certificate)

 Fixed Deposit (Tax Savings)

 Post office time deposits

 National Pension Scheme (U/S 80CCD(1) Additional Rs.50000 is considered for

Deduction i.e over and above Rs.150000

Medical Expenditure and Insurance Premium (Section 80D)

Section 80D is a deduction you can claim on medical expenses. One could save tax on medical

insurance premiums paid for the health of self, family and dependent parents.

The limit for Section 80D deduction is :

 Rs 25,000 for premiums paid for self/family.

 Rs. 50,000 for premiums paid for senior citizen parents.

 Additionally, health checkups to the extent of Rs 5,000 are also allowed and covered

within the overall limit.

 Deduction upto Rs. 50,000 with respect to medical expenditure incurred by the senior

citizen (60 years or above) or towards senior citizen parents, provided they are not covered

under any mediclaim policy.

The taxpayer can claim maximum deduction of Rs. 50,000 including the premium amount and

medical expenditure if he is a senior citizen

(60 years or above). In addition to that if he has paid the medical bills of his senior citizen

parents, he can claim additional deduction upto Rs. 50,000.

Your employer may pay premium on your behalf and deduct it from your salaries. Such premium

paid is also eligible for deduction under section 80D.

Interest on Home Loan (Section 80C and Section 24)

Another key tax saving tool is the interest paid on home loans. Homeowners have the option to

claim up to Rs. 2 lakh as a deduction for interest on home loan for self-occupied property. If the

house property is let out, you can claim a deduction for the entire interest pertaining to such a

home loan.

Please note that from FY 2017-18, the loss from house property that can be set off against other

sources of income has been restricted to Rs. 2 lakh.

In addition to the above, one can also claim the principal component of the housing loan

repayment as a deduction under section 80C up to a maximum limit of Rs 1.5 lakh.

Read more about deductions from house property

Deduction for Loan for Higher Studies (Section 80E)

Income Tax Act provides a deduction for interest on education loans. The significant conditions

attached to claiming such deduction are that the loan should have been taken from a bank or a
financial institution for pursuing higher studies (in India or abroad) by the individual himself or

his spouse

or children.

One may begin claiming this deduction beginning from the year in which the loan starts getting

repaid and up to the next seven years (i.e. total of 8 assessment years) or before repayment of the

loan, whichever is earlier. Even a legal guardian could avail this income tax deduction.

Read more about deductions from Section 80E

Donations (Section 80G)

Section 80G of the Income Tax Act, 1961 offers income tax deduction to an assessee, who

makes donations to charitable organizations. This deduction varies based on the receiving

organisation, which implies that one may avail deduction of 50% or 100% of the amount

donated, with or without restriction.

Read more about Section 80G

Deduction on Savings Account Interest (Section 80TTA)

Section 80TTA of the Income Tax Act, 1961 offers a deduction of up to INR 10,000 on income

earned from savings account interest. This exemption is available for Individuals and HUFs. In

case the income from bank interest is less than INR 10,000, the whole amount will be allowed as

a deduction.
However, in case the income from bank interest exceeds INR 10,000, the amount after that

would be taxable.
Read more about deduction from Section 80TTA

Interest on Home Loan (Section 80EE)

Section 80EE allows homeowners to claim an additional deduction of Rs.50,000 (Section 24) for
interest component of the home loan EMI. Subject to the following:

 The loan must not be for more than Rs 35,00,000

 The value of the property must not be more than Rs 50,00,000.

 The individual must not have any other property registered under his name at the time the

loan is sanctioned.

Read more about deduction from Section 80EE

Tax treatment on Notice Pay and Joining Bonus

Some companies ask you to sign a bond or agreement stating you will serve the company for a

specified period of time. If you happen to leave the organisation before completing this period,

the organisation may recover the notice pay or the joining bonus paid to you initially.

The tax liabilities for these components are explained with illustrations below:

Illustration I
Notice Pay: Consider that Mr C, with a work experience of 1 year 6 months, was working with

Organisation A with an agreement of 2 years. The agreement stated that if he quits the job within

the agreement period, he must pay the salary of 3 months as notice pay. Mr C wanted to quit the

job and join the Organisation B. The new firm agreed to pay the notice amount so that Mr C

could join them sooner. Mr C wants a refund on TDS for the notice pay as he has not received

the salary from Organisation 1. In this case, the former organisation must not include the notice

pay under the ‘total salary paid’ category in Form 16. This helps Mr C get a TDS refund on the

notice pay. If the organisation does not make necessary adjustments in Form 16, Mr C cannot get
a refund.

Illustration II

Joining Bonus: Consider the case of Mr C. Say, he had received a joining bonus of Rs.100,000

from Organisation 1 while joining. Since he has not completed the agreement period, he must

pay back the joining bonus while leaving the company. Let us consider that he asks the new

company to reimburse the joining bonus for him and the new organisation does reimburse. In this

case, Mr C must check the Form 16 given by both the organisations. If Organisation 1 has also

included the joining bonus in Form 16, then Mr C will not be able to obtain a refund of the TDS

from the income tax department. In this case, the TDS is a dead loss that can neither be

recovered or adjusted in ITR.

Exemptions on Perquisites

Cab facility transport provided by employer

Employers generally provide cab facility to and from the office and residence of the employees.

Such a facility is not taxed as a perquisite for the employee. The facility would be an expense for

the employer.

As per the Indian Income Tax Act, use of any vehicle provided by a company or an employer for

a journey by the employee from his residence to his office or another place of work, shall not be

regarded as a taxable perquisite, even if provided to him free of cost or at a concessional rate.

Health club facility provided by employer

In the case of a health club facility provided by employer uniformly to all employees, the facility

is not taxable as a perquisite in the hands of the employee.

Gifts or vouchers provided by employer

Gifts or vouchers given by an employer in cash or in kind are tax exempt up to Rs 5,000 per

year.

Medical expenditure incurred outside India on employee

In a case where the employer incurs expenditure on medical treatment outside India:

 On the employee

 Any member of the family of such employee

 Travel and stay abroad of the employee or any member of the family in connection with

the medical treatment

 Travel and stay abroad of one attendant who accompanies the patient in connection with

the medical treatment

‘Family’ means the spouse and children of the individual. Also the parents, brothers and sisters

of the individual or any of them, wholly or mainly dependent on the individual. The above

expenditure would be exempt from tax for the employee subject to the condition that –

 The expenditure on medical treatment and stay abroad shall be exempted only to the extent
permitted by the Reserve Bank of India; and

 The expenditure on travel shall be excluded from perquisite only in the case of an

employee whose gross total income, as computed before including therein the said

expenditure, does not exceed two lakh rupees.

Capital Gains Tax – What is Capital Gains Tax In India, Types, Tax Rates, Calculation,

Exemptions & Tax saving

A guide to tax impact on income from capital gains Tax - Definition, Types, Exemptions & Tax

saving on Capital Gains

The due date to file income tax return for the AY 2021-22 (FY 2020-21) stands extended to 31st

December 2021 for individual taxpayers. For tax audit and Transfer Pricing cases, the due date

has extended to 15th February 2022 and 28th February 2022 respectively.
Amendments to Section 54 – Capital Gains Exemption Taxpayers can now obtain a long-term

capital gains exemption on the sale of a house by investing in two houses (upper limit of Rs 2

crore). Earlier, the exemption was available for investment in only one property.

Capital Gains is an investment in a house property is one of the most sought out investments.

The primary reason is to own a house, while others invest to seek a return upon the sale of the

immovable property. A house property is a capital asset for income tax purposes. The gain or

loss on the sale of a house property is taxable or allowed as a deduction in your income tax

return. Similarly, capital gains or losses arise from different types of assets. We will discuss the
chapter on ‘Capital gains’ here.

What is Capital Gains Tax In India?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This

gain or profit is comes under the category ‘income’, and hence you will need to pay tax for that

amount in the year in which the transfer of the capital asset takes place. This is called capital

gains tax, which can be short-term or long-term. Capital gains are not applicable to an inherited

property as there is no sale, only a transfer of ownership. The Income Tax Act has specifically
exempted assets received as gifts by way of an inheritance or will. However, if the person who

inherited the asset decides to sell it, capital gains tax will be applicable.

Defining Capital Assets

Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and

jewellery are a few examples of capital assets. This includes having rights in or in relation to an
Indian company. It also includes the rights of management or control or any other legal

right. The following do not come under the category of capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980)
issued by the central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued

under the Gold Monetisation Scheme, 2015

Definition Types of Capital Assets?

1. STCG ( Short-term capital asset ) An asset held for a period of 36 months or less is a short-

term capital asset. The criteria of 36 months have been reduced to 24 months for immovable

properties such as land, building and house property from FY 2017-18. For instance, if you sell

house property after holding it for a period of 24 months, any income arising will be treated as

long-term capital gain provided that property is sold after 31st March 2017.

2. LTCG ( Long-term capital asset ) An asset that is held for more than 36 months is a long-

term capital asset. The reduced period of the aforementioned 24 months is not applicable to

movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a

long-term capital asset if held for more than 36 months as earlier. Some assets are considered

short-term capital assets when these are held for 12 months or less. This rule is applicable if the
date of transfer is after 10th July 2014 (irrespective of what the date of purchase is). The assets

are:

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange

in India

c. Units of UTI, whether quoted or not

d. Units of equity oriented mutual fund, whether quoted or not

e. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are considered

as long-term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the

period for which the asset was held by the previous owner is also included when determining

whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares,

the period of holding is counted from the date of allotment of bonus shares or rights shares

respectively.

Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

Tax Type Condition Tax applicable

Long-term Except on sale of equity shares/ 20%

capital gains tax units of equity oriented fund

 Long-term On sale of Equity shares/ units of 10% over and above Rs 1 lakh

capital gains tax equity oriented fund

Short-term When securities transaction tax is The short-term capital gain is added to your income

capital gains tax not applicable the taxpayer is taxed according to his income tax sla

Short-term When securities transaction tax is 15%.

capital gains tax applicable

Tax on Equity and Debt Mutual Funds

Gains made on the sale of debt funds and equity funds are treated differently. Any fund that

invests heavily in equities (more than 65% of their total portfolio) is called an equity fund.

Funds Effective 11 July 2014 On or before 10 July 2014

Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains

Debt At tax slab rates of At 20% with indexation At tax slab rates of 10% without indexat

Funds the individual the individual with indexation whic

Equity 15% 10% over and above Rs 1 15% Nil

Funds lakh without indexation.

Change in Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital

asset. It means you need to remain invested in these funds for at least three years to get the

benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be

added to your income and will be taxed as per your income tax slab rate.

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Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over
a shorter period.

Terms You Need to Know:

Full value consideration The consideration received or to be received by the seller as a result of

transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no

consideration has been received.

Cost of acquisition The value for which the capital asset was acquired by the seller.

Cost of improvement Expenses of a capital nature incurred in making any additions or

alterations to the capital asset by the seller.

Note that improvements made before April 1, 2001, is never taken into consideration.

NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise

than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement
incurred by the previous owner would also be included.

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

 Expenditure incurred wholly and exclusively in connection with such transfer

 Cost of acquisition

 Cost of improvement

Step 3: This amount is a short-term capital gain Short term capital gain = Full value

consideration Less expenses incurred exclusively for such transfer Less cost of

acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

 Expenditure incurred wholly and exclusively in connection with such transfer

 Indexed cost of acquisition

 Indexed cost of improvement

Step 3: From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F,

and 54B
Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer

Less: Indexed cost of acquisition

Less: Indexed cost of improvement

Less: Expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or

transfer of the capital asset are allowed to be deducted. These are the expenses which are

necessary for the transfer to take place.)

As per Budget 2018, long term capital gains on the sale of equity shares/ units of equity oriented

fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. Moreover,

tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs

1 lakh in one financial year without the benefit of indexation.

In the case of sale of house property: These expenses are deductible from the total sale price:

a. Brokerage or commission paid for securing a purchaser

b. Cost of stamp papers

c. Travelling expenses in connection with the transfer – these may be incurred after the transfer

has been affected.

d. Where property has been inherited, expenditure incurred with respect to procedures associated

with the will and inheritance, obtaining succession certificate, costs of the executor, may also be

allowed in some cases.

In the case of sale of shares: You may be allowed to deduct these expenses:

a. Broker’s commission related to the shares sold

b. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold: Here, and a broker’s services were involved in securing a buyer, the

cost of these services can be deducted.Note that expenses deducted from the sale price of assets

for calculating capital gains are not allowed as a deduction under any other head of income tax

return, and you can claim the only once.

Indexed Cost of Acquisition/Improvement

Cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done

to adjust for inflation over the years of holding of the asset. This increases one’s cost base and

lowers the capital gains. Refer to this page for the complete list of CII.

Indexed cost of acquisition is calculated as Cost of acquisition / Cost inflation index (CII) for

the year in which the asset was first held by the seller, or 2001-02, whichever is later X cost

inflation index for the year in which the asset is transferred.

Indexed cost of improvement is calculated as:

Indexed cost of acquisition = Cost of acquisition * Cost Inflation Index (CII) of the year in which

the asset is transferred / Cost inflation index (CII) of the year in which asset was first held by the

seller or 2001-02 whichever is later. Indexed cost of improvement = Cost of improvement * Cost

inflation index of the year in which the asset is transferred / Cost inflation index of the year in

which improvement took place

Section 54: Exemption on Sale of House Property on Purchase of Another House Property

Budget 2019 announcement!

Capital gains exemption under Section 54: Assessees can get an exemption from long term

capital gains from the sale of house property by investing in up to two house properties against

the earlier provision of one house property with same conditions. However, the capital gains on

the sale of house property must not exceed Rs 2 crores.

The exemption The exemption under section 54 is available when the capital gains from the sale

of house property are reinvested into buying or constructing two another house properties (prior

to Budget 2019, the exemption of the capital gains was limited to only 1 house property).

The exemption on two house properties will be allowed once in the lifetime of a taxpayer,

provided the capital gains do not exceed Rs. 2 crores. The taxpayer has to invest the amount of

capital gains and not the entire sale proceeds. If the purchase price of the new property is higher

than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.

Conditions for availing this benefit:

1. The new property can be purchased either 1 year before the sale or 2 years after the sale of

the property.

2. The gains can also be invested in the construction of a property, but construction must be

completed within three years from the date of sale.

3. In the Budget for 2014-15, it has been clarified that only 1 house property can be

purchased or constructed from the capital gains to claim this exemption.

4. Please note that this exemption can be taken back if this new property is sold within 3
years of its purchase/completion of construction.

Section 54F: Exemption on capital gains on sale of any asset other than a house property

Exemption under Section 54F is available when there are capital gains from the sale of a long-

term asset other than a house property. You must invest the entire sale consideration and not only

capital gain to buy a new residential house property to claim this exemption. Purchase the new

property either one year before the sale or 2 years after the sale of the property. You can also use

the gains to invest in the construction of a property. However, the construction must be

completed within 3 years from the date of sale.

In Budget 2014-15, it has been clarified that only 1 house property can be purchased or

constructed from the sale consideration to claim this exemption. This exemption can be taken

back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are

invested towards the new house, the entire capital gain will be exempt from taxes if you meet the

above-said conditions.
However, if you invest a portion of the sale proceeds, the capital gains exemption will be in the

proportion of the invested amount to the sale price = capital gains x cost of new house /net

consideration.

Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds

Exemption is available under Section 54EC when capital gains from sale of the first property are

reinvested into specific bonds.

 If you are not keen to reinvest your profit from the sale of your first property into another

one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway

Authority of India (NHAI) or Rural Electrification Corporation (REC).

 The money invested can be redeemed after 3 years, but they cannot be sold before the

lapse of 3 years from the date of sale. With effect from the FY 2018-2019, the period of 3

years has been increased to 5 years;

 The homeowner has six month’s time to invest the profit in these bonds. But to be able to

claim this exemption, you will have to invest before the tax filing deadline.

When can you invest in Capital Gains Account Scheme?

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a

new property is one time-consuming process. Fortunately, the Income Tax Department agrees

with these limitations. If capital gains have not been invested until the date of filing of return

(usually 31 July) of the financial year in which the property is sold, the gains can be deposited in

a PSU bank or other banks as per the Capital Gains Account Scheme, 1988.
This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid

on it. However, if the money is not invested, the deposit shall be treated as short-term capital

gains in the year in which the specified period lapses.

Saving Tax on Sale of Agricultural Land

In some cases, capital gains made from the sale of agricultural land may be entirely exempt from

income tax or it may not be taxed under the head capital gains.

a. Agricultural land in a rural area in India is not considered a capital asset and therefore any

gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a

rural area, see above.

b. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land

regularly or in the course of your business, in such a case, any gains from its sale are taxable

under the head Business and Profession.

c. Capital gains on compensation received for compulsory acquisition of urban agricultural land

are tax exempt under Section 10(37) of the Income Tax Act.

If your agricultural land wasn’t sold in any of these cases, you can seek exemption under Section

54B.

Section 54B: Exemption on Capital Gains From Transfer of Land Used for Agricultural

Purpose
When you make short-term or long-term capital gains from transfer of land used for agricultural

purposes – by an individual or the individual’s parents or Hindu Undivided Family (HUF) – for

2 years before the sale, exemption is available under Section 54B. The exempted amount is the

investment in a new asset or capital gain, whichever is lower. You must reinvest into a new

agricultural land within 2 years from the date of transfer.

The new agricultural land, which is purchased to claim capital gains exemption, should not be

sold within a period of 3 years from the date of its purchase. In case you are not able to purchase

agricultural land before the date of furnishing of your income tax return, the amount of capital

gains must be deposited before the date of filing of return in the deposit account in any branch

(except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains

Account Scheme, 1988.

Exemption can be claimed for the amount which is deposited. If the amount which was deposited

as per Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall

be treated as capital gains of the year in which the period of 2 years from the date of sale of land

expires