Bought plots in 2020, selling in 2027 or 2028? Should I convert them into capital assets to save tax?

A real estate company may hold a property as stock-in-trade with the intention of selling it as part of its business. But what happens if the company decides to stop treating the property as stock-in-trade and instead holds it as a capital asset?

That is the situation facing a reader whose private limited company owns two residential plots bought in 2020. The company is considering converting the plots into capital assets now and selling them in 2027 or 2028, hoping to benefit from the lower tax rate applicable to long-term capital gains.

Today's Q&A explains such details in response to a query by a reader.

Please note that though there is no cash inflow due to conversion of stock in trade into capital asset of your residential plot but you will still have to pay tax in the year in which such conversion takes place.

The difference between the fair market value on the date of conversion of stock in trade into capital asset and the date of sale of the asset so converted shall be taxed as long term capital gains or short term capital gains depending on the holding period.

For the purpose of computing the holding period, the period shall start from the date on which the stock in trade is treated as capital asset.

If you sell the plots after holding them for 24 months or more, you will have to pay tax at 12.50% on the difference between fair market value on the date of conversion and actual date of sale.