A real estate company is considering converting residential plots from stock-in-trade to capital assets to benefit from lower tax rates on long-term capital gains. According to reports from Personal Finance News, the company owns two residential plots purchased in 2020 and is evaluating this conversion strategy for potential sale in 2027 or 2028. The conversion would allow the company to treat these properties as capital assets rather than inventory for business purposes.
The conversion creates immediate tax obligations despite no actual cash inflow. As reported by Personal Finance News, the company will pay tax in the year of conversion on the difference between fair market value at conversion and the actual sale date. If the plots are sold after 24 months or more, the tax rate will be 12.50% on this difference, which is treated as long-term capital gains. The holding period calculation starts from the date of conversion to capital asset status.
The company can claim exemption on long-term capital gains by investing in capital gain bonds of prescribed financial institutions within six months from the sale date. According to the report, this exemption is available under Section 85 of the Income Tax Act 2025, which became effective from April 1, 2026. The exemption applies specifically to capital gains from the sale of converted capital assets.
The taxation occurs in two stages: initially at conversion and later when the asset is sold. As reported by Personal Finance News, since tax must be paid immediately upon conversion without actual cash inflow, the strategy is not recommended unless expecting significant appreciation in plot values post-conversion. The appreciation would be taxed at 12.50% instead of the regular rate applicable to business income, making the conversion financially advantageous only for substantial value increases.
